403(b) vs 401(k)-- enlighten me please!

[Guest Lyric]

I work in the nonprofit sector, and I can contribute to a 403(B) but not a 401(k).

(1) Can anybody spell out for me the essential differences between a 403(B) and a 401(k) in terms of both the sources of (and limits to) contributions and the tax implications?

(2) I know that nonprofit employers don't match contributions to 403(B) plans, but that aside, why am I getting the feeling that they are much less efficient than 401(k) plans, offering a very limited choice of investment products (mostly annuities)? What's the rationale for focusing on annuities?

Lyric

[Kathy]

The focus is on annuities because, before 403(B)(7) was added to the code (in 1974 by ERISA), 403(B) specified that the investment had to be an annuity. Now you can have mutual funds or annuities but annuities have such a foothold in that market that it's hard for mutual funds to get in. Even the IRS publication on these types of plans is called "Publication 571, Tax-Sheltered Annuity Programs for Employees of Public Schools and Certain Tax-Exempt Organizations." On the inside it says, when we use the term TSA we also mean custodial accounts which hold mutual funds but then goes on to talk about annuities through out.

It makes it tough on us mutual funds!!

[Guest Mary Ann]

Lyric -

I prepare tax returns for several ministers who work for 403b organizations. They usually have matching funds from the church up to a certain percentage of their w-2 income. So, matching does take place in 403b organizations.