Are you familiar with the type of retirement plan your company offers? Maybe you’ve started a new job that provides a different option than your previous employer. Or perhaps you’ve been there for a while but haven’t yet enrolled in this valuable employee benefit. Either way, you may have access to a 401(k) or a 403(b) — but what are the differences? While both plans are designed to help you build retirement savings, each has unique features. Understanding how your plan works can help you make more informed decisions about your retirement strategy.
First, the Similarities
Many features of these two retirement plans are similar. Both 401(k)s and 403(b)s are tax-advantaged retirement plans that employers can provide to their workforce, allowing workers to contribute toward their retirement and enjoy tax-advantaged growth on their investments until funds can be withdrawn at age 59.5. Employees can select how much they want to contribute and choose to allocate funds to different investments offered within the plan. Both types of plans allow catch-up contributions after age 55, and both may offer a Roth option, enabling tax-free withdrawals in retirement provided certain conditions are met. With a Roth option, contributions are made with after-tax dollars, meaning you pay taxes up front. In exchange, qualified withdrawals — including contributions and any earnings — are tax-free.
Now, the Differences
Perhaps the biggest difference is that 401(k)s are offered through private-sector employers, while 403(b)s are found in the public and nonprofit sectors. For-profit businesses of all sizes can offer 401(k) plans, making them the most common type of employer-sponsored retirement account in the U.S. 403(b)s are available through public schools as well as charities, churches and other types of tax-exempt organizations.
Governance and protections. Typically, 401(k)s are governed by the Employee Retirement Income Security Act (ERISA), which mandates specific protections and requirements. Some 403(b) plans, particularly those from government agencies and public schools, may be exempt from ERISA requirements, giving them more flexibility, but potentially fewer protections.
Plan design and features. With some 403(b)s, employees with more than 15 years of service may be eligible for an additional catch-up contribution. And while both 401(k) and 403(b) plans may offer loan options, the specific terms and availability can vary by employer and plan administrator.
Investment options. Historically, 403(b) plans were managed by multiple providers (often insurance companies), which sometimes resulted in higher fees and more complex investment choices. Some 403(b)s have more limited investment options compared to 401(k)s and may be more likely to include annuities in their investment lineup. Generally, 401(k)s offer a more streamlined setup, with mutual funds as the primary investment choice.
Income limits and vesting. While 401(k)s can often accommodate high net worth individuals, some 403(b)s have maximum income limits. So while a 401(k) might cap how much you can contribute per year, a 403(b) can sometimes go a step further and exclude participation by those whose annual income, as of 2024, exceeds $345,000. In addition, 403(b)s may have shorter vesting periods, meaning that you might not have to wait as long to have full access to your funds.
Two Great Ways to Save for Retirement
Both types of plans offer valuable ways to help build retirement savings. Each plan type comes with unique features, and there may be other differences beyond what’s covered here — so understanding how yours works is what matters most. Does your employer offer matching contributions? Are there other benefits, like access to professional financial guidance? Taking the time to learn about these specifics can empower you to make better informed decisions about your retirement strategy. Consulting with a Financial Professional or your human resources department can also be helpful in maximizing the benefits of whichever plan you have.
Sources
https://www.investopedia.com/ask/answers/100314/what-difference-between-401k-plan-and-403b-plan.asp