403(b) vs. 401(k)

Both allow you to save for retirement, but there are differences you should know about.

Written by Devon Delfino / July 11, 2022

Quick Bites

  • 401(k)s are available via private companies.
  • 403(b)s are only an option from certain public institutes and tax-exempt organizations.
  • Both allow you to save for retirement, may offer an employer match and can reduce your taxable income.

Saving for retirement comes with a lot of questions: How much do I need to retire? When should I retire? Will my employer help me get there? What kind of retirement savings account should I get? On that front, there are many options to choose from.

For those who aren’t familiar, 401(k)s and 403(b)s both offer a way to save for retirement. But there are specific differences you should be aware of. Here’s what you need to know.

Inside this article

  1. What's a 401(k)?
  2. What's a 403(b)?
  3. What's the difference?
  4. Contributions
  5. Which is better for you?

What's a 401(k)?

A 401(k) is an employer-sponsored retirement plan. Typically, you contribute to this on a monthly basis, and the cash is taken out of your paycheck. Many companies will also offer an employer match for 401(k)s, which is often set as a percentage of your contribution. For example, your employer might offer a 100% match up to 5% of your salary. Essentially, that’s free money for retirement.

When you contribute to a 401(k), that money is usually deductible from your taxable income, but you do have to pay taxes on it once you start withdrawing funds in retirement.[1] There’s also a 10% tax if you take out money before you turn 59 ½. There are some exceptions, including:

  • Severance or separation from service

  • Payments to someone else a qualified domestic relations order

  • Payments for medical care (though the amount is limited)

  • Disability

  • IRS-approved disaster relief

  • Death[2]

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What's a 403(b)?

A 403(b) is a tax-sheltered annuity plan offered by public schools and some tax-exempt organizations which allows those employees to save a percentage of their income for retirement.[3]

“It is a retirement account that allows you to put money away, either pre-tax (traditional) or post-tax (Roth),” says Jay Zigmont, a Certified Financial Planner and founder of Childfree Wealth in Water Valley, Miss. “Your employer may make a match contribution to your 403(b) just like a 401(k), or not.”

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Like a 401(k), if you take your money out of a 403(b) before you are 59 ½, you will have to pay a 10% penalty. There may be exceptions, however, in the following circumstances:

  • Financial hardships

  • Severance

  • Disability

  • Death[3]

What's the difference?

“A 403(b) is like a 401(k), but it is only for non-profits and governmental employees. As an employee, a 403(b) works much the same as a 401(k),” says Zigmont.

However, the two accounts aren’t necessarily on equal ground when it comes to flexibility. And 401(k)s typically offer a bit more in terms of investment options (with options like stocks, mutual funds, bonds, and other securities), while 403(b)s may be limited to mutual funds and annuities.[4,5]

At the same time, 403(b)s may have higher fees, says Eric Phillips, a Chartered Financial Analyst at Human Interest, a retirement savings provider.

“This, in combination with the fact that many organizations don't have a lot of options when it comes to 403(b) providers, means that many of the current 403(b) plans currently in existence offer employees a confusing set of high-fee funds,” he says.

And then there are differences in how much you can contribute.

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With both 401(k)s and 403(b)s, you can contribute up to $20,500 per year.[6] Both plans also offer catch-up contributions for those over 50, limited to $6,500 per year.[7]

However, 403(b) plans have an additional catch-up contribution option that isn’t available to those with a 401(k). You can contribute up to $15,000 under that catch-up rule as long as you’ve worked for the organization for at least 15 years.[8]

Which is better for you?

Although 401(k)s and 403(b)s are both retirement accounts, they aren’t typically going to be offered to the same people. That’s because 401(k)s are an option from for-profit companies, while 403(b)s are for non-profits and certain government employees. You also cannot open a 401(k) or 403(b) on your own as someone might open an individual retirement account (IRA)—it has to come through your employer.[9]

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So ultimately, although there is some overlap here, it’s not really a question of which is better since you probably won’t be in a situation where you have to choose between the two. It’s about making sure that you put enough money toward your retirement. (In fact, both 401(k)s and 403(b)s allow for automatic enrollment.)[1,3]

If you are looking to maximize your retirement savings, though, you should know that you may be able to open an an IRA to stash away extra cash—even if you have a 401(k) or 403(b).[10,11] IRA contributions are limited to $6,000 per year (or $7,000 if you’re 50 or older).[12]

Article Sources
  1. “401(k) Plan Overview.” Internal Revenue Service. Nov. 15, 2021. https://www.irs.gov/retirement-plans/plan-sponsor/401k-plan-overview.
  2. “401(k) Resource Guide - Plan Sponsors - General Distribution Rules.” Internal Revenue Service. Jan. 20, 2022. https://www.irs.gov/retirement-plans/plan-sponsor/401k-resource-guide-plan-sponsors-general-distribution-rules.
  3. “Retirement Plans FAQs regarding 403(b) Tax-Sheltered Annuity Plans.” Internal Revenue Service. Nov. 18, 2021. https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-403b-tax-sheltered-annuity-plans.
  4. “Investing in Your 401(k).” FINRA.org. https://www.finra.org/investors/learn-to-invest/types-investments/retirement/401k-investing/investing-your-401k.
  5. “Evaluating Your Retirement Options.” SEC.gov. June 9, 2008. https://www.sec.gov/reportspubs/investor-publications/investorpubsteacheroptionshtm.html.
  6. “IRS announces changes to retirement plans for 2022.” Internal Revenue Service. Nov. 17, 2021. https://www.irs.gov/newsroom/irs-announces-changes-to-retirement-plans-for-2022.
  7. “50 or older? 4 ways to catch up your savings.” Fidelity. May 26, 2022. https://www.fidelity.com/viewpoints/retirement/catch-up-contributions.
  8. “Issue Snapshot - 403(b) Plans - Catch-Up Contributions.” Internal Revenue Service. Feb. 18, 2022. https://www.irs.gov/retirement-plans/403b-plans-catch-up-contributions.
  9. “Individual Retirement Arrangements (IRAs).” Internal Revenue Service. April 29, 2022. https://www.irs.gov/retirement-plans/individual-retirement-arrangements-iras.
  10. “401(k) vs. IRA? Use both if you can.” Vanguard. https://investor.vanguard.com/investor-resources-education/iras/401k-vs-ira.
  11. “Save With a 403(b) or Roth IRA. Or Both.” Texas State Securities Board. https://www.ssb.texas.gov/investors/teachers/save-403b-or-roth-ira-or-both.
  12. “Traditional and Roth IRAs.” Internal Revenue Service. Nov. 5, 2021. https://www.irs.gov/retirement-plans/traditional-and-roth-iras.

About the Author

Devon Delfino

Devon Delfino

Devon Delfino is a writer who’s covered personal finance—including everything from student loans to budgeting to saving for retirement and beyond—for the past six years. Her financial reporting has appeared in publications like the L.A. Times, U.S. News and World Report, Teen Vogue, Masha

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