The first step is to check with your employer regarding any retirement plan(s) it provides for employees, as you can only participate in a plan sponsored by your employer, including 401(k) and 403(b) plans.
If your employer offers both a 401(k) and 403(b) plan, you may choose to participate in either or both (if allowed), depending on your preference.
Generally, you will find the 401(k) and 403(b) plans similar: the contribution limits are the same; both plans allow employees to make contributions on a pre-tax basis; both plans have the ability to offer loans to employees; and, for both plans, employees must meet certain requirements to be able to withdraw assets from the plan.
The key difference between 403(b) and 401(k) plans lies in the investment options.
403(b) investments are often limited to annuity contracts or mutual funds and money market funds (the type of 403(b) will determine whether the investment must be annuity contract or mutual fund). The investment options for 401(k) plans include any publicly-traded securities, mutual funds, options, etc. The plan may limit the investments to a selected list prepared by the plan administrator.
If your employer does not sponsor a retirement plan at this time, you may consider contributing to a Traditional IRA or a Roth IRA. These plans allow you to contribute up to $6,000 per year ($7,000 if you are at least age 50 by the end of the year for which the contribution is being made). In the meantime, you might want to consult with your employer about offering a retirement plan for employees.
Dan Stewart, CFA®
Revere Asset Management, Dallas, TX
A 401(k) is a private business retirement plan usually accompanied by a tax-deductible company match. A 403(b) is a government or non-profit plan normally without a match. This is because there is no incentive, other than altruistic, to match since non-profits and governments don’t need a tax deduction.
As a teacher, you most likely have a 403(b). Investing in the 403(b) can be disadvantageous since you can most likely get the same or similar investment strategy directly with a mutual fund without putting it inside of a costly annuity first. In other words, there’s no point in buying an S&P 500 Index fund within an annuity with fees when you can simply invest in an S&P 500 Index fund. One exception to this would be guaranteed, fixed interest accounts with higher net-of-fee rates.