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Investing/Strategies / Retirement Investing
|Subject: Re: 403b vs. 401k||Date: 3/18/1998 8:29 AM|
|Author: TMFPixy||Number: 2241 of 73923|
<<Can someone explain the difference between these two, or point me to where I can find out. >>
401(k) Plan. Also known as a cash or deferred arrangement (CODA) plan, a 401(k) is a qualified defined contribution plan that takes its name from the section of the Internal Revenue Code which prescribes the rules under which it operates. It is a retirement plan in which the employer permits an employee to elect to receive part of his or her compensation in cash or to defer immediate receipt by contributing that part to his or her account in the 401(k) plan. Deferred contributions are made on a pre-tax basis, and those contributions and all earnings remain untaxed until withdrawn from the plan. The 401(k) may permit voluntary, after-tax contributions by employees. Earnings on after-tax contributions accumulate tax free until withdrawn. Many plans include a matching contribution from the employer according to a set formula (e.g., 50% of the employee's contribution up to a maximum of 6% of compensation). Employers may also make contributions to an employee's account independent of the employee's contribution, and these contributions may be tied to a firm's profits as part of a profit sharing plan. Participant pre-tax contributions are limited to the lesser of a maximum percentage of pay or $10,000 (as adjusted periodically for inflation) per year. The percentage limitation varies from employer to employer depending on a number of factors, but generally ranges from 12% to 20% of annual compensation.
A 401(k) plan generally offers participants an opportunity to direct their account contributions to a broad range of investment options from conservative risk to aggressive risk. These options may include institutional or mutual funds investing in the money market, bond market or stock market; annuities; guaranteed investment contracts (GICs); company stock; and self-directed brokerage accounts. A typical plan will offer a selection of a money market fund, a bond fund, and a stock fund.
In general, a 401(k) plan limits withdrawals of assets to five occasions: Termination from employment, disability, reaching the age of 59 1/2, retirement and death. Additionally, the plan may optionally include provisions for loans and/or hardship withdrawals.
State and local governments are prohibited from offering a 401(k) plan to their employees. This was once true of private, tax-exempt employers as well; however, as of January 1, 1997, the latter may now establish a 401(k) plan for their qualified employees.
403(b) Plan. A 403(b) plan is a defined contribution plan that takes its name from the section of the Internal Revenue Code that establishes the rules under which it operates. It is also known as and sometimes called a tax sheltered or a tax deferred annuity program. This plan is for educational, religious and charitable (i.e.,501(c)(3)) organization employees. It operates under similar maximum contribution rules and withdrawal privileges as a 401(k) plan. Like the 401(k), pre-tax contributions and all earnings remain tax free until withdrawn. There are two principal differences between a 401(k) and 403(b) plan. First, unlike the 401(k) plan, investment options in the 403(b) plan are limited to annuities and mutual funds only. Second, the 403(b) plan permits additional contributions under certain conditions that would otherwise exceed the normal annual limit of $10,000, as indexed. These additional contributions are to allow participants to "catch up" contributions for years in which they didn't participate, a feature not found in a 401(k) plan.
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