401(k) and 403(b) Plans
The difference between 401(k) and 403(b)
A 401(k) plan is a retirement plan that is offered through an employer. It is the most common kind of defined contribution retirement plan.
A 403(b) is very similar to a 401(k) but was, historically, offered to employees of tax-exempt organizations.
Recent changes to the rules of 403(b) plans has led even non-profits to offer 401(k) plans instead.
Types of 401(k) Plans
Traditional
In a Traditional 401(k), deferrals are added to the 401(k) account as pre-tax funds. Savers don’t have to pay income taxes on those deferrals in the year that it’s deferred. Instead, the participant will only pay income tax on that money once it is withdrawn from the account as income later in life (i.e. during retirement).
Roth
In a Roth 401(k), deferrals are added to the 401(k) account as after-tax funds. In this scenario, savers will pay income tax on that money in the year that it’s earned, as one normally would when earning income. Later in life, when withdrawing funds from the retirement account, that money and any investment earnings it has accumulated in the time it spent in the account, will be withdrawn tax-free.
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