FINRA Series 7 / 63 / 65 401(k) and 403(b) Plans
Last updated: May 2, 2026
401(k) and 403(b) Plans questions are one of the highest-leverage areas to study for the FINRA Series 7 / 63 / 65. This guide breaks down the rule, the elements you need to recognize, the named traps that catch most students, and a memory aid that scales to test day. Read it once, then practice the same sub-topic adaptively in the app.
The rule
401(k) and 403(b) plans are qualified, employer-sponsored, defined-contribution retirement plans authorized under the Internal Revenue Code. 401(k) plans (IRC §401(k)) are available to for-profit employers; 403(b) plans (IRC §403(b)), also called tax-sheltered annuities (TSAs), are restricted to public schools, 501(c)(3) tax-exempt organizations, and certain ministers. Both allow pre-tax salary-deferral contributions (or designated Roth contributions if the plan permits), tax-deferred growth, and ordinary-income taxation on distributions, with a 10% additional tax on early withdrawals before age 59½ unless an exception applies. ERISA fiduciary standards generally apply to 401(k) plans and to most private 403(b) plans; governmental and church 403(b) plans are typically exempt from ERISA.
Elements breakdown
Plan Sponsorship & Eligibility
Identifies which employers may offer each plan and which employees may participate.
- 401(k): for-profit and most non-profit employers
- 403(b): public schools, 501(c)(3)s, certain ministers
- Age 21 and one year of service (typical ERISA max)
- Plan document defines eligibility waiting period
- Governmental 403(b) generally outside ERISA
Contribution Limits & Catch-Up
Annual elective deferral caps under IRC §402(g) plus catch-up provisions for older participants.
- Elective deferral limit applies across all 401(k)/403(b) plans combined
- Age 50+ catch-up adds an extra deferral amount
- 403(b) 15-years-of-service catch-up (qualifying employers only)
- Employer match counts toward §415 overall limit
- Designated Roth deferrals share the §402(g) cap
Common examples:
- A teacher with 16 years at the same district may use both age-50 and 15-year catch-ups if eligible
Tax Treatment of Contributions
How pre-tax, Roth, and after-tax contributions are taxed at deferral and distribution.
- Pre-tax deferrals reduce current W-2 wages
- Roth deferrals taxed now, qualified distributions tax-free
- Employer match always pre-tax (taxable on distribution)
- FICA still applies to all elective deferrals
- Earnings grow tax-deferred regardless of source
Vesting
Schedule by which an employee acquires nonforfeitable rights to employer contributions.
- Employee deferrals always 100% immediately vested
- Employer match: 3-year cliff or 6-year graded (max)
- Safe-harbor and QACA contributions have own rules
- Forfeitures returned to plan or used for expenses
- 403(b) often has immediate vesting by plan design
Distributions & Penalties
Rules governing when funds may be withdrawn and applicable taxes.
- Ordinary income tax on pre-tax amounts at distribution
- 10% penalty if under 59½ unless exception applies
- Separation from service at age 55+ exception (not IRAs)
- Hardship withdrawals allowed if plan permits
- RMDs begin at applicable RMD age (currently 73)
- Roth qualified distributions: 5-year rule + 59½/death/disability
Loans & Hardships
In-service access provisions when permitted by the plan document.
- Loans up to lesser of $50,000 or 50% of vested balance
- Five-year repayment (longer for primary residence)
- Hardship withdrawal requires immediate, heavy financial need
- Hardships taxable and may incur 10% penalty
- Loan default treated as deemed distribution
Rollovers & Portability
Movement of plan assets to other qualified vehicles upon a triggering event.
- Direct rollover avoids 20% mandatory withholding
- 60-day indirect rollover window
- Pre-tax to Traditional IRA or new employer plan
- Roth 401(k)/403(b) to Roth IRA permitted
- In-plan Roth conversions allowed if plan offers
Common patterns and traps
The Wrong-Sponsor Swap
The question presents an employer that does not qualify for the plan type named in the choices. Candidates often miss that 403(b) plans are restricted to public schools, 501(c)(3) organizations, and certain ministers — not all non-profits and not for-profit employers, regardless of size or mission. A privately-held LLC, even one doing charitable work, cannot sponsor a 403(b).
A choice that says a profitable family-owned bakery 'should establish a 403(b) for its employees,' or that a 501(c)(6) trade association qualifies for a 403(b).
The IRA-Rule Cross-Contamination
A choice imports an IRA rule into a 401(k)/403(b) context or vice versa. The most-tested example is the age-55 separation-from-service exception to the 10% penalty, which applies only to qualified employer plans, never to IRAs. The reverse trap drops the first-time homebuyer or higher-education IRA exceptions into a 401(k) scenario where they do not apply for penalty relief.
A choice that says a 56-year-old who rolled her 401(k) to an IRA can still withdraw penalty-free under the age-55 rule, or that a 401(k) participant can take a $10,000 penalty-free first-home distribution.
The Match-Is-Roth Confusion
In a designated Roth 401(k) or Roth 403(b), candidates assume the employer match also receives Roth treatment. The match is always made on a pre-tax basis and tracked in a separate pre-tax source account. Recent law allows plans to optionally permit Roth-treated match, but candidates should default to the long-standing rule unless the question explicitly invokes the new election.
A choice stating that 'all employer contributions to a Roth 401(k) account are tax-free upon qualified distribution,' or 'matching contributions follow the deferral's Roth or pre-tax character automatically.'
The Aggregate-Limit Miss
A candidate sees that someone contributes to two plans (e.g., a 401(k) at a side job and a 403(b) at the main job) and assumes each plan has its own elective-deferral cap. The §402(g) elective deferral limit is per-participant across all 401(k)s and 403(b)s combined; only the §415 overall annual additions limit is per-employer.
A choice that adds two separate elective-deferral limits together to justify a contribution above the §402(g) cap, or treats moonlighting employment as resetting the annual deferral limit.
The Vesting Overreach
The question quietly distinguishes employee elective deferrals from employer contributions, and a wrong choice claims the participant 'forfeits her own deferrals' on early termination, or that the entire account balance is subject to a vesting schedule. Employee deferrals (and rollover contributions) are always 100% immediately vested; only employer contributions can be subject to cliff or graded schedules.
A choice saying an employee who quits after one year 'loses her elective deferrals because she is not yet vested,' or that a six-year graded schedule applies to the participant's salary deferrals.
How it works
Think of these plans as two siblings with the same DNA but different households. Imagine Marisol, age 52, who teaches at a public high school and contributes $20,000 to her district's 403(b). Because she is over 50, she may add the age-50 catch-up; if she also has 15+ years with the same qualifying employer, she may layer the 403(b)-only 15-year catch-up on top, subject to lifetime cap and ordering rules. Her elective deferrals reduce her current taxable wages, grow tax-deferred, and will be taxed as ordinary income when she withdraws in retirement. If she leaves the district at age 56, she may take distributions without the 10% penalty under the separation-from-service-at-55 rule — a feature that does NOT exist for IRAs. If she instead rolls the balance to a Traditional IRA, she gives up that exception. The same mechanics apply to a 401(k) participant at a for-profit employer; the principal differences are sponsor type, certain investment vehicle restrictions (403(b) historically limited to annuities and mutual funds), and the special 15-year catch-up.
Worked examples
Which of the following statements MOST accurately addresses Damaris's penalty concern?
- A She must wait until age 59½ to avoid the 10% additional tax, regardless of her separation from service.
- B Distributions taken directly from the 401(k) after separation from service in or after the year she turns 55 are not subject to the 10% additional tax. ✓ Correct
- C She can avoid the 10% additional tax only by rolling the balance to a Traditional IRA and taking substantially equal periodic payments.
- D The 10% additional tax never applies to distributions from a qualified plan after age 55.
Why B is correct: Under IRC §72(t)(2)(A)(v), distributions from a qualified employer plan (including 401(k) and 403(b)) made to a participant who separates from service during or after the year he or she attains age 55 are exempt from the 10% additional tax. Damaris is 57 and has separated, so direct distributions from the 401(k) qualify. Ordinary income tax still applies; only the 10% penalty is waived.
Why each wrong choice fails:
- A: This ignores the age-55 separation-from-service exception, which is specifically designed for situations like Damaris's. The blanket 'wait until 59½' statement is wrong for qualified plans. (The IRA-Rule Cross-Contamination)
- C: Rolling to an IRA actually destroys the age-55 exception, because the exception applies only to qualified employer plans. SEPP/72(t) payments work but are not the only path; this choice presents a worse alternative as the only option. (The IRA-Rule Cross-Contamination)
- D: The exception requires both attainment of age 55 in the year of separation AND that the distribution come from the plan of the employer she separated from — not any qualified plan distribution after age 55.
Which response is MOST accurate?
- A Because Tomás's deferrals are designated Roth, the 4% employer contribution is also treated as Roth and will be tax-free upon qualified distribution.
- B The 4% employer contribution is held in a separate pre-tax source account; the contribution and its earnings will be taxed as ordinary income upon distribution. ✓ Correct
- C The employer contribution must be allocated proportionally between Roth and pre-tax based on the employee's deferral election, so 100% will be tax-free.
- D Employer contributions to a 403(b) are nontaxable at distribution because they were never includible in the employee's wages.
Why B is correct: Even when an employee elects designated Roth treatment for elective deferrals, employer non-elective and matching contributions are made on a pre-tax basis and tracked in a separate source account. The contributions and their earnings are includible in gross income as ordinary income when distributed. Recent law optionally allows plans to permit Roth-treated employer contributions, but absent such a plan election, the long-standing default applies.
Why each wrong choice fails:
- A: This is the core trap: Roth treatment of deferrals does not flow through to employer contributions. They land in a separate pre-tax bucket regardless of how the employee's deferrals are taxed. (The Match-Is-Roth Confusion)
- C: There is no proportional-allocation rule for employer contributions based on the employee's Roth election. Employer contributions go to a single pre-tax source unless the plan and employee specifically elect otherwise under recent law. (The Match-Is-Roth Confusion)
- D: Employer contributions to a 403(b) ARE excluded from wages at the time of contribution, but that is precisely why they are taxable upon distribution — the tax was deferred, not eliminated.
Which statement is MOST accurate regarding Priya's ability to defer additional amounts to the Carrolton 403(b)?
- A She may contribute up to the full §402(g) elective deferral limit again to the 403(b) because each employer has its own separate cap.
- B She is prohibited from participating in the 403(b) because she is already an active participant in another qualified plan.
- C The §402(g) elective deferral limit applies in aggregate across her 401(k) and 403(b); having maxed her 401(k), she cannot make additional elective deferrals to the 403(b) (subject only to any 403(b)-specific 15-year catch-up if eligible, which she is not). ✓ Correct
- D She may defer an additional 50% of the §402(g) limit to the 403(b) under the dual-plan coordination rule.
Why C is correct: The §402(g) elective deferral limit is a per-participant limit that aggregates contributions across all 401(k) and 403(b) plans. Once Priya has reached the limit through her 401(k) deferrals, she cannot make further pre-tax or Roth elective deferrals to the 403(b), absent eligibility for a plan-specific catch-up such as the 403(b) 15-years-of-service catch-up (which requires 15 years with the same qualifying employer — she does not have that). Employer contributions and the §415 overall limit are separate, employer-by-employer, but elective deferrals are aggregated at the participant level.
Why each wrong choice fails:
- A: This is the classic aggregate-limit miss. Section 402(g) explicitly aggregates elective deferrals across all 401(k) and 403(b) plans of the same individual; only §415 is per-employer. (The Aggregate-Limit Miss)
- B: Active participation in one plan does not bar participation in another. The constraint is the aggregate deferral cap, not eligibility.
- D: There is no '50% dual-plan coordination rule' in the Code. This is a fabricated rule designed to look plausible alongside genuine coordination rules. (The Aggregate-Limit Miss)
Memory aid
"DEFER-VEST-DISTRIBUTE": Defer (under §402(g) limit) → Vest (deferrals always, match per schedule) → Distribute (ordinary income + 10% if under 59½ unless exception).
Key distinction
401(k) is for for-profit and most employers broadly; 403(b) is restricted to public schools, 501(c)(3)s, and certain ministers — and only 403(b) offers the 15-year-of-service catch-up.
Summary
401(k) and 403(b) plans share elective-deferral mechanics and tax-deferred growth, but differ in eligible sponsors, certain catch-up rules, and historical investment vehicle restrictions.
Practice 401(k) and 403(b) plans adaptively
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Start your free 7-day trialFrequently asked questions
What is 401(k) and 403(b) plans on the FINRA Series 7 / 63 / 65?
401(k) and 403(b) plans are qualified, employer-sponsored, defined-contribution retirement plans authorized under the Internal Revenue Code. 401(k) plans (IRC §401(k)) are available to for-profit employers; 403(b) plans (IRC §403(b)), also called tax-sheltered annuities (TSAs), are restricted to public schools, 501(c)(3) tax-exempt organizations, and certain ministers. Both allow pre-tax salary-deferral contributions (or designated Roth contributions if the plan permits), tax-deferred growth, and ordinary-income taxation on distributions, with a 10% additional tax on early withdrawals before age 59½ unless an exception applies. ERISA fiduciary standards generally apply to 401(k) plans and to most private 403(b) plans; governmental and church 403(b) plans are typically exempt from ERISA.
How do I practice 401(k) and 403(b) plans questions?
The fastest way to improve on 401(k) and 403(b) plans is targeted, adaptive practice — working questions that focus on your specific weak spots within this sub-topic, getting immediate feedback, and revisiting items you missed on a spaced-repetition schedule. Neureto's adaptive engine does this automatically across the FINRA Series 7 / 63 / 65; start a free 7-day trial to see your sub-topic mastery climb in real time.
What's the most important distinction to remember for 401(k) and 403(b) plans?
401(k) is for for-profit and most employers broadly; 403(b) is restricted to public schools, 501(c)(3)s, and certain ministers — and only 403(b) offers the 15-year-of-service catch-up.
Is there a memory aid for 401(k) and 403(b) plans questions?
"DEFER-VEST-DISTRIBUTE": Defer (under §402(g) limit) → Vest (deferrals always, match per schedule) → Distribute (ordinary income + 10% if under 59½ unless exception).
What's a common trap on 401(k) and 403(b) plans questions?
Confusing 403(b) eligibility with any non-profit (must be 501(c)(3) or public school)
What's a common trap on 401(k) and 403(b) plans questions?
Forgetting age-55 separation exception applies to qualified plans, NOT IRAs
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