If you or your spouse have a career in education, you probably have been contributing to a 403(b) account, but do you know exactly what that means? Your may have even been told that it was the equivalent of a 401(k), for those that work in education, but there are some striking differences you may not be aware of.
The Basics of a 401(k)
There are a variety of businesses that offer a 401(k) to their employees and there are several advantages to using this as your retirement savings vehicle. The most beneficial of these advantages is the long-term tax advantages of utilizing a 401(k). The contributions taken out of your paycheck will be made with pre-tax dollars. The elective deferral (contribution) limit for employees who participate in 401k, 403(b), most 457 plans, and the federal government's Thrift Savings Plan has increased from $17,500 to $18,000.This reduces the amount the IRS views as “earned income” for the year, and will likely put you in a lower tax bracket. All taxes on your earnings through the account will be deferred until you withdraw money. If you anticipate having lower expenses in retirement, this can be an avenue to big savings on your tax bill.
Many employers will also match your contributions up to a certain percentage. This is free money that your employer contributes to your retirement as a benefit and reward for your own savings. A smaller number of employers will have a profit sharing option as well meaning that they contribute a certain amount of the company’s profits to a pool for all of their employees, who then get a cut of it contributed to their 401(k)s based on their salary. Generally employers will do this so they can contribute more to their own retirement account.
The Basics of a 403(b)
A 403(b) is a retirement vehicle offered by anyone who can claim tax-exempt status as a category 501(c)(3). Most commonly this means that they are offered by nonprofits and educational organizations. In many ways, they operate similarly to a 401(k). Contributions are made with pre-tax dollars, those who contribute are eligible for the Saver’s Tax Credit, and taxes are deferred until withdrawal.
Here is where the similarities end. A majority of employers will not offer to match any portion of your 403(b) contributions, and are unable to offer profit sharing as a benefit. 403(b) plans are generally not sponsored by the employer, but are set up to facilitate a relationship between the employee and the insurance company that manages the fund’s annuities. The reason employers do this is so that they are not subject to the Employee Retirement Income Security Act (or ERISA,) and do not have to provide you with annual reports, or audit information.
When 403(b) plans are non-ERISA, they are only compelled to comply with state regulations when it comes to fiduciary duty and acting in their employee’s best interest. In many cases, these state regulations are poorly defined. For this reason, it is especially important to have a fiduciary you can trust when you hold investments in a 403(b).
Which Plan is Superior?
Both the 401(k) and 403(b) come laden with tax advantages, and are great ways to save money for retirement. If you have the opportunity to contribute to a 401(k), you will have greater opportunities for added benefits like employer matching, profit sharing, and the ability to file any claims against your employer under ERISA. Whichever plan your employer offers, take advantage of it. Saving for retirement in either account is better than not saving anything at all.
About Caldwell Trust Company
Caldwell Trust Company is an independent trust company with offices in Venice and Sarasota, Florida. Established in 1993, the firm currently manages over $800 million in assets for clients throughout the United States. The company offers a full range of fiduciary services to individuals, including services as trustee, custodian, investment adviser, financial manager and personal representative. Additionally, Caldwell manages 401(k) and 403(b) qualified retirement plans for employers.