403(b) vs. 401(k) - What's the Difference?

If you’re starting a new job, there’s a good chance you’re going to have the option to join an employer-sponsored retirement plan, and it’ll probably be one of two types of plans: a 403(b) or a 401(k). Both are defined contribution plans. Employees who participate in the plans choose how much to put into their account each month, and the payout in retirement is determined based on how much they save during their careers and how their investments perform.

A financial advisor could help you create a financial plan for your retirement needs and goals.

Though 401(k) plans and 403(b) plans are similar in many ways, there are a few key differences you should know if you’re about to start a new job where one of these plans is offered, especially if you’ll be contributing to one type of plan after having participated in the other at a previous company.

403(b) vs. 401(k): Similarities

Let’s start by taking a look at the similarities between a 401(k) plan and a 403(b) plan. Employers sponsor both types of retirement plans. Employees join the plan if they want to save for retirement, and the company may also offer to match employee contributions up to a certain limit. The money is then invested into investment vehicles such as mutual funds. The end goal is that the market (hopefully) grows steadily throughout your career and you have saved a tidy nest egg for when you retire.

Employees contribute pre-tax money in both 401(k) plans and 403(b) plans. When an employee eventually retires, they pay income tax on the money as it is withdrawn from the plan. This has a couple of implications. First, it means that by contributing to one of these retirement plans, you are lowering your taxable income in the current year. Secondly, if you expect to be in a lower tax bracket come retirement, this would mean that the tax burden for the money you invest is less than it would have been if you’d paid taxes when you earned it.

The same rules for maximum contributions govern both types of plans. The maximum amount you can contribute to either a 401(k) or a 403(b) in 2024 is $23,000 (up from $22,500 in 2023). This is cumulative, so if you switch jobs mid-year you can contribute a total of $23,000 to all defined contribution plans you have access to in a given year. The contribution limit for both plans increases by $7,500 for employees who are 50 or older.

Both plan types also allow for early withdrawals, but not without penalties. Fees and fines are applied to those wishing to take money out of either kind of retirement plan before age 59 ½ (or in some cases age 55).

403(b) vs. 401(k): Differences

There are some noteworthy differences between a 403(b) vs. a 401(k). The most important is the types of workplaces that offer the two plans. For-profit companies typically offer 401(k) plans. Most people work at for-profit companies, meaning the majority of workplace retirement plan participants use a 401(k.) Not-for-profit and public sector institutions, meanwhile, use 403(b) plans. If you work for a charity or government entity, like a school or a municipal department, you may have the ability to save through a 403(b.)

The Employee Retirement Income Security Act of 1974 (ERISA) governs all 401(k) plans. Some 403(b) plans are subject to the same law, but not all. Essentially, if you work at a private not-for-profit employer like a charity or think tank, your plan is subject to ERISA. If you work in a public sector job like a school system or public university, though, your plan is not subject to ERISA regulations. ERISA protects plan participants and guarantees certain rights. Make sure to know whether or not your plan is subject to the law.

Participants who have been employed at a not-for-profit entity for more than 15 years may find another difference between the two plan types that plays to their benefit, especially if they were derelict in planning for retirement early in their careers. Employees who have been with the company for more than 15 years can make extra contributions beyond the 403(b) contribution limit. In 2024, these employees can defer up to $26,000 into their 403(b) plan. One caveat: this is only relevant to some 403(b) plans. The company or municipality that sponsors the plan has to choose to offer it as a feature.

Bottom Line

Generally, you don’t have a choice between a 401(k) and a 403(b.) The type of employer you work for determines which type of plan you have access to. Whichever you use, though, you’ll be getting the same basic experience. You’ll choose how much money to contribute from each paycheck. The money typically goes into your account before taxes are taken out, and you pay taxes when you withdraw it in retirement. There is a limit to how much money you can contribute with a 401(k) and a 403(b), and your employer may match a percentage of your contributions. The differences between the two types of plans might not even impact you much unless you’re an older worker.

Saving for retirement is important no matter which plan you have access to. Instead, focus on getting the most out of your money by saving as much as you can and investing it wisely.

Retirement Planning Tips

A financial advisor can be a valuable resource as you plan your retirement. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
If you contribute to a pre-tax retirement savings account like a traditional IRA or 401(k), you may want to consider saving money in a Roth account or performing a Roth conversion. Roth accounts are funded with after-tax money so your funds grow tax-free from that point on and aren’t taxed when you take them out. Additionally, they aren’t subject to required minimum distributions (RMDs), giving you more tax flexibility in retirement.