If your employer offers both a 403(b) and a 401(k), you can contribute to both plans in order to boost your retirement savings. However, there are limits on the combined total of so-called salary reduction contributions you can make in a tax year.
The limit for 2019 is $19,000, plus $6,000 a year if you are age 50 or over. For tax year 2020, it increases to $6,500 plus $1,500 for those over 50.
Those are the same limits that are placed on contributions to either plan individually. So, you are free to use both vehicles but the upper limits on tax-deferred contributions remain the same.
- You can contribute to more than one retirement account if you choose.
- The maximum tax-deferred contribution is the same whether you contribute to one or both accounts: $19,000 total in 2019 and $19,500 in 2020.
- Taxpayers age 50 and above can contribute another $6,000 in "catch-up" savings in 2019 and $6,500 in 2020.
About 403(b) and 401(k) Plans
The 403(b) plan is typically made available to employees of non-profits such as public schools, tax-exempt organizations, and religious groups. Contributions are made in pre-tax dollars and the deductions are made directly from the employee's salary.
The employer may match a portion of the employee's contribution. The employee chooses how to invest the money based on options offered by the employer.
If this sounds similar to a 401(k), it is, from the employee's viewpoint. The 403(b) has fewer administrative requirements as it was designed for cash-strapped non-profits. In addition, a 403(b) is often administered by an insurance company rather than a mutual fund company, as is common with 401(k) plans.
Nevertheless, some employees have access to both.
In general, a 401(k) plan may have a more generous employer match. That's because big companies usually have more money to offer in benefits than non-profits, so it may not apply to a non-profit that offers both plans.
The 403(b) plan may also come with fewer investment options to consider. Those are choices that the employer makes.
One Big Difference
There is one big difference between a 403(b) and a 401(k). The IRS imposes a 10% penalty on early withdrawals from a 401(k) plan, but no penalty for a 403(b) withdrawal.
In either case, the employee will owe income taxes on the amount withdrawn early. ("Early" means before age 59½.)
The 403(b) plan was designed for use by non-profits such as public schools and charitable organizations.
One More Catch-Up
As noted above, an employee age 50 or above is permitted to contribute an extra $6,000 to either plan in 2019, or $6,500 in 2020. The IRS calls that a "catch-up." It's intended to help an employee boost savings as their retirement date grows closer.
There's another catch-up provision in the 403b plan that applies only to employees with at least 15 years of service, and then only if the employer approves it. It's worth checking out this rule if it applies to you and you can afford the extra contribution from your salary.