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Both 401(k)s and 403(b)s are types of defined contribution plans, a group that also includes 457 and TSPs (Thrift Savings Plans). All offer similar tax benefits; the major difference is in who can use them. Here’s how they break down:
- 401(k)s are the version that corporations offer to their employees. (Roth 401(k)s are a subgroup that has different tax treatment.)
- 403(b)s are for employees of public education entities and most other nonprofit organizations. For the most part, they work the same as 401(k)s.
- 457s are for state and municipal employees, as well as employees of some qualified nonprofits. A 457 also works much like a 401(k), but there are differences in contribution limits and the treatment of early withdrawals. If your employer also offers a 401(k) or 403(b) plan, you can contribute to both the 457 and the other plan for a whopping $35,000 in total or, if you’re 50 or older, $46,000 in total. Also, unlike with 401(k)s and 403(b)s, you can withdraw the funds before age 59 ½ penalty-free (you’ll still own income tax on all withdrawals).
- Thrift Savings Plans (TSPs) are for federal employees, including members of the uniformed services. The contribution levels and tax treatment of TSPs is the same as 401ks and 403bs, though TSPs are much less likely to offer matching contributions.