401(k) versus the 403(b)

Similar to the 401(k) plan, the 403(b) plan allows employees to save money for retirement in a way that avoids taxation until the money is withdrawn. However, unlike the 401(k) plan that is available to private sector employees, the 403(b) plan is only offered to those workers who are employed by what the IRS defines as businesses that are organized and operated exclusively for religious, charitable, scientific, public-safety testing, literary, or educational purposes. However, the 403(b) plan is still considered to be a benefit offered to those employees who qualify for it, but offers less investment choices.

Investments

Unlike 401(k) plans, the 403(b) plan does not allow investments in stocks. The available investment choices are annuities or annuity contracts with insurance companies, custodial accounts comprised of mutual funds which is called a 403(b)(7), and retirement income accounts that are available to churches. The 403(b) works just as a 401(k) by allowing an individual to contribute, pre-tax, a predetermined monetary amount. Once an individual retires and begins to draw from the 403(b) account on a regular basis, the income that the 403(b) provides is subject to taxation.

Problems with 403(b)

As mentioned earlier, the amount of investment choices are limited. Also, many financial experts feel that it is of no benefit to put a tax deferred investment such as an annuity into a tax deferred plan such as the 403(b). When 403(b) funds are invested in an annuity, there are often stiff penalties associated with withdrawing money early. To get around this penalty for early withdrawal, individuals can choose to direct their savings to a money market account which is likely to have very little if any penalty for early withdrawal of funds. Once funds are located in a money market account, an individual can perform what is called an asset transfer in order to place their funds into the financial institute of their choice. This method takes time and effort but is a necessary evil that must be conquered if 403(b) investors are to have much control over their retirement savings. However, complete control over how much money is invested into a 403(b) plan is not totally up to the individual. As of the year 2000, the maximum amount that can be put into a 403(b) is $10,500 or 20 percent of an individual’s salary, whichever is less.

feedback@salariesandbenefits.com