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Friday, September 29, 2023

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

401(k) vs. 403(b): What's the difference?

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

There are many different retirement savings vehicles to choose from, but some of the most powerful and common vehicles are provided by an employer, such as 401(k) and 403(b) plans. You may be wondering what the difference is between 401(k) and 403(b) plans. The main difference between a 401(k) and a 403(b) is the type of employer that can offer these plans — 403(b) plans are mainly offered by nonprofits.

The good news is that for most employees, there is little practical difference between the two plan types. In this article, we’ll look at the key similarities and differences between 401(k) and 403(b) plans.

401(k) plans

A 401(k) is a tax-advantaged, employer-sponsored plan that allows you to save for retirement in a tax-sheltered way to help maximize your retirement dollars. Sometimes, your employer may even contribute to your plan.

401(k) plans have traditionally been offered only by private, for-profit companies, though this has started to change in recent years.

403(b) plans

403(b) plans are retirement plans that can be offered by tax-exempt 501(c)(3) non-profits, public school systems and certain ministries. Plan participants can include teachers, school administrators, professors, government employees, nurses, doctors, librarians and clergy.

Contribution and withdrawal similarities

Both 401(k) and 403(b) plans are tax-advantaged retirement vehicles offered by employers. There are several methods for funding, and the one most people are familiar with is deferral into the plan directly from your paycheck. 401(k) and 403(b) plans have the following deferral limits:

  • Employees can contribute a maximum amount of $20,500 in 2022 and $22,500 in 2023.
  • For workers age 50 and older, the contribution limit increases by $6,500, for a maximum of $27,000 in 2022 and $30,000 in 2023.

1. Employer contributions

Some 401(k) and 403(b) plans are designed to allow the employer to make contributions as well. These can take the form of employer lump sum contributions at various intervals or matching where the employer contributes a certain amount on top of your own deferral.

2. Tax-advantaged accounts

Both 401(k) and 403(b) plans offer tax-deferred growth, meaning contributions within the accounts are not taxed over time as they grow. All 401(k) and 403(b) plans offer a pre-tax deferral option where your contributions are made income tax-free, and employer contributions are always made on a pretax basis. Distributions of pretax funds from the account are taxed as ordinary income.

Some plans also offer a Roth option where contributions are taxed as ordinary income when deferred into the plan. All future withdrawals are completely tax free if certain qualification requirements are met. Check with the plan administrator to learn more about your contribution options.

3. Withdrawal rules

401(k) and 403(b) plans share mostly similar rules around withdrawals. Generally, you’re not able to take a withdrawal from either plan type while still employed at the company until reaching age 59½. If you do take a withdrawal before age 59½ and don’t qualify for an IRS exception, you could be assessed a 10% penalty in addition to income taxes.

Some 401(k) and 403(b) plans offer a loan option where you can borrow from your plan account, though this is contingent on making payments back into the plan until the loan is paid off. Distributions are required in most cases from both plans once you reach age 72. We recommend working with your tax and financial advisors before taking any early withdrawals out of your retirement accounts.

What is a 403(b) vs 401(k)?

The main difference between the two plans is employment sponsorship. 401(k) plans are generally offered by private, for-profit companies, while 403(b) plans are only available to nonprofit organizations and government employers.

Investment options, cost, and matching

In addition to the employer demographics for both retirement accounts, 401(k) and 403(b) plans can have varying investment choices. Depending on the investment options offered in your 401(k) or 403(b) plans, the fees and costs you end up paying may be low or high.

Both plans allow for employer matching contributions. Also, some 403(b) plans offer an extra catch-up savings provision of $3,000 for longtime employees of the organization. This can turn into a significant extra savings option, so check with your plan administrator to learn if your plan offers this. 

Which is better for retirement?

Both 401(k) and 403(b) plans are powerful savings vehicles, especially if the employer makes contributions. One is not necessarily better than the other. Also, most employees don’t have a choice of which plan to use, so the most important thing to focus on is diligent, disciplined savings over time to pursue your long-term financial goals.

The bottom line

Preparing for retirement is part of your overall financial plan. You can take a few actions now to get yourself on the right track.

  1. Sign up for the Empower Personal Dashboard. Millions of people use these free and secure professional-grade online financial tools. You can use them to see all your accounts in one place, analyze your spending, and plan for long-term financial goals.
  2. Consider talking to a fiduciary financial advisor for more detailed guidance on your retirement saving strategies.


Scott Schleicher

Scott Schleicher


Scott is the Advisory Manager and Senior Financial Advisor at Empower.

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