Administration

• Only the following organization can set up and administer 403(b) plans: Tax-exempt organizations established under section 501(c)(3) of the Internal Revenue Code, public schools, cooperative hospital service organizations, Uniformed Services University of the Health Sciences, public school systems organized by Indian tribal governments, certain ministries.
  
  403b plans might not have to follow the Employee Retirement Income Securities Act as 401k plans do.
  
  

Contributions

• The 401k and 403b contributions are made with pre-tax dollars via a deduction from your paycheck as a percentage of the salary. Both plans allow matching employer contributions. However, the maximum allowed compensation considered for contribution to 401k is no more that $245,000. The maximum for 403b is determined by a number of factors and personal situation of the employee. In addition, 403b contributions might be eligible for a tax credit.
  
  

Distributions

• Your contributions to either retirement plan grow tax free and are taxed at your income tax rate when you start withdrawing the funds. The 401k and 403b annuities impose a 10 percent tax penalty if you start withdrawing funds before you turn 59 1/2. However, you can take the amount contributed by your employer in a 403b without the penalty, because these funds are considered to be tax-exempt by the IRS.
  
  

Employment Termination

• Another major differences between a 401k and a 403b annuity is what happens when you terminate your employment. A 401k must be rolled over in a similar qualifying plan with a different employer or independent IRA. A 403b employee, however, can keep the plan with the old employer.