Posts Tagged ‘non profit 403b’

401k versus 403b

The main difference between a 401k and a 403b is the way the company providing the two types of retirement savings accounts is structured. 403b accounts are solely reserved for non profit organizations, which include not only charities but also schools, government organizations and churches. On the whole, the two types of accounts are very similar. Since a 403b is distributed from a company that cannot legally generate profit, however, the account has a few unique features.

403b Account Features

Mainly, a 403b account cannot provide any type of profit sharing or dividend to employees of the company. If they a company provided these options, then it would not legally qualify as a non profit organization in the future. Further, the company cannot own the accounts in any way. The sole responsibility of the company is to make deposits into the account in the amount agreed upon in the employee benefits package. Other than this simple task, the company has no control over the account. This means the company cannot limit withdrawals or loans out of the account like other companies do. However, the 403b account is still managed by a financial firm which can advise employees on the best way to avoid penalties and structure taxes correctly.

401k Account Features

Your employer owns the 401k account to some degree, meaning the employer can restrict you from taking loans or withdrawals from the account unless you apply and are approved to do so. Along the same line, the company can offer profit sharing, stock and dividend payments into the 401k account. Since the company is for-profit, it does not have to be concerned with losing any tax-exempt status by making this type of arrangement.

Which Account is Better?

Unfortunately, this is not truly a question you get to ask. Depending on where you work, your employer will make the choice for you. 401k accounts tend to be more profitable, but working for a for-profit organization tends to be more profitable in general than working for a non profit organization. If you do pursue a career with a non-profit, you will see other benefits. For example, choosing a low paying public service career can allow you to have student loans forgiven and even get special mortgages from the government that are cheaper than private options.

Changing Between Accounts

If you have either a 401k from an old job or a 403b from an old job, you have options to roll these funds over and get the most out of your account. It is always advisable to speak with a tax professional. You will be responsible to pay taxes on any profit that actually transfers into your pocket during a rollover between retirement accounts. As such, it is best to have the funds move from one account to the next without ever touching your personal bank account. That way you do not have to worry about any unintended profits that could be penalized not only by taxes but also by a 10% early withdrawal fee if you are not at least 59 1/2 years old.

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