These are arrangements you make with your employer to take a portion of your income and put it into a special savings plan. This portion of your income is not taxable in the year in which it is paid into the plan.
You take home less pay, but you build up savings for retirement that have significant tax advantages over other savings plans.
"401k" contributions
This plan is named after a section of the Internal Revenue Code.
A 401k plan has two advantages over a regular savings plan. First, the money you put into the 401k plan is not included in your current taxable income. This applies even if you don't itemize deductions (that is, you take the standard deduction).
Second, the growth in a 401k plan (through interest payments, dividend payments, or increase in value of stock) is not taxed. This means that every dollar of growth is available the next year for more growth.
Because of these advantages, most financial experts will advise you to put as much money as you can afford into a 401k plan.
There is a downside to a 401k. When you finally take distributions from it (usually when you retire), it will all be subject to tax at ordinary income rates. In a regular savings plan, you might have capital gains instead of ordinary income, and capital gains tax rates are lower than ordinary income taxes.
403b contributions
Private employers have 401k plans, while public employers (such as the government and public universities) have 403b plans instead. A 403b plan is similar to a 401k plan, with the same basic advantages and disadvantages.
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