What’s the difference between a 401k, IRA, or 403B? What even is a 401k, IRA, or 403B? These are the questions that we’re going to address in episode 12 of the #EverythingMoney Show.
But before we get into all the differences between these plans, let’s look at some of the things that they have in common.
And the best place to start is at the beginning.
The Beginnings of the 401k
When the US government realized that the SSI fund wasn’t going to be enough for their 70+ million retiree population, they asked corporations to come up with some kind of supplemental retirement plan for their employees.
To incentivize the corporations to do this, the government offered them significant tax breaks to implement said retirement initiatives.
So, the corporations came up with something called a 401k. The 401k allowed employees to contribute pre-tax dollars to their retirement funds – in the form of deductions on their paychecks – while also allowing for the funds to grow tax deferred.
As awesome as this was (at the time), many small business owners and/or employees of smaller companies realized that they wanted a plausible retirement supplement, as well.
The IRA & the 403b Break Through
The IRA was introduced so that employees of smaller corporations, as well as, small business owners who also wanted to play for their futures had the option to leverage a tax deferred retirement plan.
The main similarity that the 401k had with the IRA – or with the 403b – is the option for the funds in these accounts to be deferred from the account owner’s year end taxes, and for the funds in these accounts to grow tax deferred.
And the 403b was practically identical to the 401k, with the only exception that it was offered to the employees of public or governmental organizations.
And the one big thing that they have in common are the time lines within which you can access the funds in your accounts, and the deadlines before which you HAVE TO access the funds in your accounts.
All of these accounts require that you wait until the age of 59 1/2 to access your funds; otherwise, you will have to pay significant early withdrawal penalties, on top of the capital gain’s taxes that your funds are subject to.
These accounts also have the Required Minimum Distribution Laws that require the account holder to withdraw their “required minimum distributions” BEFORE the age of 70 1/2. If the account holder doesn’t begin their RMD’s by that time, the IRS will take 50% of the account value as a tax penalty.
Differences Between the 401k, IRA, and 403b
The contribution limits to each account type varied, as did the option to “match” their contributions from their employer’s behalf. (Being that the contribution limits of these accounts change occasionally, the best way to get the current contribution limits is to Google for the information.)
For example, 401k’s typically offer “matching” – meaning that the company will actually match a portion of the employees contributions to their plan.
That would be the main difference between these 3 account types.
This is not considering a Roth IRA, as the Roth goes by a completely different set of taxation rules and doesn’t qualify for this comparison.
If you would like to start your own retirement account, or if you’re interested in rolling over your 401k, IRA, or 403b into a more secure and steadily performing option, call us directly at 866-624-3741 or request a Free Comprehensive Financial Consultation here.