401k 403b

401(k) and 403(b) Plans ## 401(k): The For-Profit Workplace Plan A 401(k) is a defined contribution retirement plan offered by for-profit employers. The name comes from the section of the Internal Revenue Code that authorized it. Employees elect to defer a portion of each paycheck into the plan on a pre-tax basis, reducing current taxable income. The money grows tax-deferred until withdrawn in retirement, at which point withdrawals are taxed as ordinary income. Real-world example: Sarah earns $80,000/year and contributes 10% ($8,000) to her 401(k). She pays income tax only on $72,000 this year — the $8,000 is not taxed until she withdraws it decades later. Her employer also matches 50% of contributions up to 6% of salary ($2,400 employer contribution), effectively delivering a 3% raise she would otherwise forfeit by not participating. Roth 401(k) option: Many modern plans now offer a Roth 401(k) — same contribution limits as the traditional 401(k), but contributions are made after-tax. Qualified withdrawals are completely tax-free. Under SECURE Act 2.0, Roth 401(k) accounts are no longer subject to RMDs beginning in 2024. --- ## 403(b): The Nonprofit and Education Plan A 403(b) plan — also called a Tax-Sheltered Annuity (TSA) — is the retirement plan equivalent of a 401(k) for employees of: - Public school systems (teachers, administrators, staff) - Nonprofit organizations (charities, foundations) - Hospitals and healthcare nonprofits - Certain ministers and church employees Functionally, 403(b)s operate nearly identically to 401(k)s: pre-tax contributions, potential employer matching, same contribution limits, and the same withdrawal rules. Historically 403(b)s were restricted to annuity contracts (hence "tax-sheltered annuity"), but modern plans typically also offer mutual fund options. **Key exam distinction: 403(b) = nonprofits/schools; 401(k) = for-profit…