403(b) Plan: How it Operates, Difference with 401(k) Plan, Pros & Cons

November 16, 2021

People are always fond of the savings plan, which offers tax benefits. There are multiple benefits of such savings plans, which provide a good amount of tax benefits. While one can save a certain amount of money instead of paying tax, then it helps him to maintain financial stability.

By thinking about the financial stability of the citizen, different governments of different countries introduced several tax savings retirement plans. Among them, 403(b) plan is one that also offers the benefits of rebates and keeps up financial stability.

Moreover, this type of 403(b) plan helps save money by initiating 2 ways investment options. Read the entire blog to know more about it and the difference with the 401(k) plan.

Definition of 403(b) plan


When an employed person used to invest, the employers defer the amount from his total income to an investment account as a retirement plan, then it is known as 403(b) plan. Unlike any other retirement plan, one can easily withdraw the amount after a long time. Even a 403(b) investor can easily save a similar amount which he gets as a contributory amount from the employer.


403(b) plan comes under the genre of Tax Sheltered Annuity (TSA) investment. But there are criteria that one must fulfil to get the benefits of the 403(b) plan. An employee can apply for the enrolment of this particular plan only when he belongs to an organisation that is a tax exempted one. Generally, churches, educational institutes, care homes etc., come under this type of tax-exempted organisation.


When you are working under an organisation that is a tax exempted institute, the employer may offer you such an extra savings plan. It is up to you whether you want to invest money into this account or not. However, according to the financial advisors, if an organisation is offering a 403(b) plan, then being an employee, one must utilise the chance to keep up the growth of the fund.


How 403(b) plan operates?


If you have already invested money into a 401(k) plan, then you may find some similarities with 403(b). Unlike 401(k), one can also define himself what kind of investor he is. Such as, whether a person wants to take a high risk, he will define himself as an aggressive investor.


On the other hand, there is also the facility of choosing moderate and conservative types. Due to lots of options, a 403(b) plan is much better than other retirement plans. Basically, what most of the employers do, they hire a person in the human resource department and make him a representative. He needs to take care of portfolio management and functions as a personal financial advisor of the company.


There is also the facility of withdrawing money from the account if you have decided to change the job. Unlike IRA investment, you need not wait long to withdraw money. This is the main benefit of the 403(b) plan. However, some people also like to transfer the saved amount into an IRA account for more benefits.


Moreover, you must vest the 403(b) plan to utilise the entire amount saved within the account. Only the vested amount is the contribution which you own at the end of each year. There is a possibility of losing your employer’s contribution if you do not vest the contributory amount as early as possible.


Differences between 401(k) & 403(b) Retirement Investment Plan


Although it may seem that both of these retirement plans are similar, it is not completely true, and there are some differences. One very common difference is, a 403(b) investment plan holder can efficiently utilise the fund wherever he wants. For example, if the person wants to purchase a car, then he can also utilise the money for that purpose.


On this note, we would like to inform you that taking out guaranteed car finance for bad credit is also another way to buy a car. Let us know some of these differences, which include,



401(k) Retirement Investment Plan

403(b) Retirement Investment Plan

·         Organizations

Only for-profit companies can offer their employees this type of retirement plan.

None but only tax-exempted organizations can provide their employees such investment plans.

·         Facility of matching

An organisation that offers a 401(k) plan to its employees restricts matching contributions as per the ERISA rules and regulations.

There are no such restrictions for matching either employee’s or employer’s contribution in the 403(b) plan.

·         Type of shares

Through 401(k), one can invest in multiple shares like an annuity, mutual fund, stock, bonds etc.

On the contrary, through 403(b), there is a limitation of investment. While the option for investment options, one can’t choose more than annuity and mutual fund.

·         Usage

 An investor of 401(k) can only use the fund after retirement or reaching the age of 60.

One can use the fund saved in 403(b) for multiple purposes. Even one can easily withdraw the entire amount when he leaves the job.


Pros & Cons of investing money in 403(b) Plan


There are both advantages and disadvantages of investing money through the 403(b) plan. Before investing through this account, you must consider both these pros and cons. Such as,




·         One can easily save money by contributing through the 403(b) plan. This is because an employee does not need to pay any tax even if he earns an extra return from the 403(b) plan investment. For this reason, one can save a good amount of money out of his investment income.


·         Even wealthy persons would like to invest money in 403(b) because of long time tax benefits. Whatever the total amount of wealth a person may have, it grows completely tax-free. To enjoy this benefit, most of the wealthy investors even like to invest money.


·         Easy to withdraw money when you are no longer a part of the same organisation. Unlike other retirement plans offered to people, either you can’t withdraw money before approaching the age band of 60, or even if you make a partial withdrawal, you also need to pay charges. On the contrary, you need not pay anything even if you want to withdraw the entire amount saved within the account.


·         The facility of borrowing money against their investment is also available in this 403(b) plan. Therefore, one can stay worry-free about borrowing money when he has invested money in this particular plan.



Unfortunately, there are some disadvantages of investing money in 403(b) plans too. We will advise you to go through the cons also before investing. These are,

·         There is a limitation of investing money for maximum amount. Above 19000 Euros one can’t save money through 403(b) plan. So, if you are thinking that you can save as much as you can to enjoy tax free benefits then you are wrong.


·         Although the facility of borrowing is there, one must remember that when borrowing money by utilising the 403(b) plan, one must repay it with tax. So, if you are planning to purchase a car through borrowing money from 403(b) investment, then drop it. Besides, look for direct lenders who offer car finance with no guarantor.

So, make sure before investing money through a 403(b) retirement plan because it also has some cons.

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