What’s the Difference Between 401(k) and 403(b) Plans?

Quick Answer

401(k) and 403(b) plans are both employer-sponsored retirement plans that help you make tax-deferred contributions toward your retirement. Whereas 401(k)s are for for-profit companies, 403(b)s are for nonprofits and certain government agencies such as public schools.

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Both 401(k)s and 403(b)s are employer-sponsored retirement plans that let you contribute to your own retirement savings with pretax dollars. The main difference between 401(k) and a 403(b) retirement plan is the type of employer that offers them: 401(k)s are offered by for-profit, private-sector companies, while 403(b)s can be found at nonprofits, churches and certain government agencies including public schools and universities.

If you're trying to figure out the differences between these two types of accounts, here's a quick overview of how 401(k)s and 403(b)s are alike and what sets each one apart.

What Are 401(k) and 403(b) Plans?

Let's start with some common features. Both 401(k) and 403(b) plans are employer-based. Many offer automatic contributions that deposit a certain percentage of each paycheck you earn into your retirement account. Employers may choose to match all or part of your contributions up to a certain percentage of your annual compensation; they can also make contributions that aren't dependent on your participation in the plan.

Additionally, 401(k)s and 403(b)s share these attributes:

  1. They are typically tax-deferred. You contribute pretax dollars, which decreases your taxable income and can lower your tax bill. Your money grows without tax until you're ready to withdraw it in retirement, when you'll pay taxes on withdrawals as ordinary income.
  2. They may also be available in Roth versions. This allows you to contribute post-tax dollars to your retirement plan and withdraw your money tax-free in retirement. Designated Roth accounts have different rules and tax benefits than their standard counterparts, so read up on Roths if you're considering one. Also be aware that not all employers provide a Roth option.
  3. They have the same annual contribution limits. For 2022, the contribution limit for both 403(b) and 401(k) plans is $20,500, or $27,000 if you are age 50 or older. Your contribution also cannot exceed 100% of your compensation.
  4. You must wait until 59½ to withdraw money without a penalty. The penalty for early withdrawal is 10%, which you pay in addition to paying state and federal income taxes on the money you withdraw.
  5. Both require you to begin withdrawing money by age 72. This required minimum distribution is common to both 401(k)s and 403(b)s.

How Are 401(k) and 403(b) Plans Different?

These two types of accounts have far more similarities than differences. But even small differences in individual plan rules, investment choices and features can be important. For example, your employer's 403(b) plan may offer a more generous employer match or higher-performing investments than another employer's 401(k).

Here are some common differences between 401(k) and 403(b) plans:

Employer Profile

The main difference between these plans lies in the type of employer behind each plan. For-profit enterprises offer 401(k) plans; government agencies, non-profits, hospitals or churches are likely to offer 403(b)s.

Investment Choice

The investments offered in a 401(k) plan vary from employer to employer, but usually consist of a mix of mutual funds, stocks, bonds and other securities. Your company's 401(k) may also offer shares of company stock. Assets in a 403(b) are generally limited to mutual funds and annuities.

Matching Funds

Although employer contributions are allowed on either type of account, some employers that offer 403(b)s may be hesitant to provide them because of additional regulations. 401(k) accounts are automatically covered by regulations in the Employee Retirement Income Security Act (ERISA), which includes reporting and fiduciary requirements. ERISA applies to 403(b) plans only under certain circumstances, including when employers contribute to their employees' plans.

Expenses

403(b) plans may charge higher fees than 401(k)s. Costs vary from plan to plan, however, so check your individual plan (or plans, if you're comparing) to know exactly what you're paying.

Additional Contributions

Annual contribution limits are the same for 401(k)s and 403(b)s, but some 403(b) plans allow employees who have worked for the organization for at least 15 years to contribute up to $3,000 in additional funds per year up to a lifetime limit of $15,000.

401(k) vs. 403(b): Which Is Better?

Because these basic plans are similar, it's hard to choose one type over the other. High contribution limits, automatic savings opportunities and potential matching funds on employer-sponsored plans make either a 401(k) or 403(b) a great choice for most retirement savers.

What if you're choosing between one employer that offers a 401(k) and another that has a 403(b)? Or what if you're choosing between plans at one of the rare employers that offers both? Try looking at each plan individually. A few items to check:

  • How much will your employer contribute? Contributions from your employer often play a big role in maximizing your retirement savings. If your employer matches your contribution dollar for dollar, they are doubling your savings from the outset and therefore doubling your investment base. A bigger employer contribution is a clear and immediate advantage.
  • What are the investment options? Some 403(b)s may not offer as wide a range of options, but you may not need dozens of choices. How have investments performed historically? Are you comfortable with the choices?
  • What is the vesting period? A vesting period is the amount of time you must work before your employer's contributions to your retirement plan is yours. Sometimes 403(b) plans have shorter vesting periods than 401(k)s, but check your individual plans to learn more.

If you want to compare two retirement plans side by side, consider using an online investment calculator. Map out your likely retirement contributions, including whatever your employer would match. Then estimate what your money might be worth when you retire, taking your investment choices and expenses into account. Past performance is not a guarantee of future results, as folks in the investment business like to say. However, calculating the likely dollar-for-dollar differences between retirement plans can help you evaluate which is the better choice.

Simplifying Your Retirement Savings

Participating in your employer's retirement plan is worth considering, whether it's a 401(k) or a 403(b). Planning for your retirement is a lifelong process. Contributing to a qualified retirement plan with automatic paycheck deductions and your employer's help is a simple, nearly effortless way to make progress toward your goal.

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