What’s the Difference Between 401(k) and 403(b)?
by Grant Marsten - October 2024
If you're saving for retirement in the United States, you may encounter either a 401(k) or a 403(b) plan. Both are employer-sponsored retirement plans that can provide valuable tax advantages, but they are designed for different types of employers and have some important differences.
The good news is that neither plan is automatically better for everyone. In many cases, your employer determines which type of plan is available to you. What matters most is understanding the contribution rules, investment choices, employer contributions, fees, and withdrawal options available under your specific plan.
Understanding the Basics: 401(k) vs 403(b)
Both 401(k) and 403(b) plans allow employees to save for retirement through payroll deductions. Depending on the plan, contributions may be made on a traditional pre-tax basis, through a Roth option, or both.
The biggest difference is who can sponsor the plan.
401(k) plans are commonly offered by private-sector employers and certain other eligible organizations.
403(b) plans are generally available to employees of public schools and certain tax-exempt organizations, including eligible charities, hospitals, and religious organizations.
Government employees are not automatically covered by a 403(b). Depending on the employer and position, they may instead participate in another retirement system, such as a governmental 457(b) plan or a pension.
Who Qualifies for a 401(k)?
A 401(k) is one of the most common employer-sponsored retirement savings arrangements in the United States. Private-sector companies frequently offer 401(k) plans as part of their employee benefits.
The specific eligibility requirements, employer contributions, investment menu, vesting schedule, and fees depend on the employer's plan.
Some employers offer traditional 401(k) contributions, Roth 401(k) contributions, or both. Employer matching contributions may also be available.
Who Is Eligible for a 403(b)?
A 403(b) is designed primarily for employees of public schools and certain tax-exempt organizations. Teachers and employees of eligible nonprofit organizations and educational institutions are among the workers who may have access to a 403(b).
Like a 401(k), a 403(b) can allow traditional pre-tax contributions and, when offered by the plan, Roth contributions. The investment choices and fees depend on the individual plan rather than simply on the fact that it is a 403(b).
Key Differences Between 401(k) and 403(b)
At first glance, 401(k) and 403(b) plans can look very similar. Both can help employees build retirement savings through payroll contributions, but there are differences worth understanding.
Contribution Limits
The IRS sets annual employee contribution limits for both plans. The limits change periodically, so it is important to use the limit for the tax year in which you are contributing.
For 2024, the employee elective-deferral limit for both 401(k) and 403(b) plans was $23,000. Employees age 50 and older could generally contribute an additional $7,500 catch-up contribution.
The limits have increased since this article was originally published. For 2026, the regular employee contribution limit for 401(k) and 403(b) plans is $24,500. The standard age-50-and-over catch-up contribution is $8,000, subject to the applicable rules.
Some 403(b) participants may also qualify for a special catch-up contribution of up to $3,000 based on 15 years of service with the same eligible employer. This is subject to specific eligibility and calculation rules and is separate from the standard age-based catch-up.
Beginning in 2025, the SECURE 2.0 Act also introduced a higher catch-up contribution for certain workers ages 60 through 63. The applicable amount is adjusted under the law and can differ from the standard age-50 catch-up.
Employer contributions are generally subject to separate annual limits, meaning the total amount that can go into a retirement plan can be higher than the employee elective-deferral limit alone.
Investment Options
Investment choices can differ considerably from one employer plan to another.
Historically, some 403(b) plans offered a relatively narrow selection of annuity contracts and mutual funds, while many 401(k) plans offered broader menus of mutual funds and other investment options. However, this is not a rule that applies to every plan.
When comparing two plans, look at the actual investment menu, expense ratios, administrative fees, and any available low-cost index funds rather than assuming one plan type is automatically better.
Employer Contributions
Both 401(k) and 403(b) plans can offer employer contributions, including matching contributions.
An employer match can be an important part of your total compensation. For example, an employer might contribute a percentage of your salary when you contribute to the plan yourself.
However, matching is not guaranteed simply because an employer offers a 401(k) or 403(b). Check your specific plan's contribution formula and vesting requirements.
Fees
Fees can have a meaningful effect on long-term retirement savings, but there is no universal rule that 403(b) plans have lower fees than 401(k) plans.
Some 403(b) plans can have low-cost investment options and modest administrative expenses, while others may contain higher-cost investment products or annuity contracts. The same is true of 401(k) plans.
When evaluating your plan, look for:
- Investment expense ratios
- Administrative fees
- Recordkeeping fees
- Advisory fees
- Sales charges or other investment-related costs
Even relatively small annual fees can compound into a significant difference over several decades.
401(k) vs 403(b): A Quick Comparison
- Typical employer: 401(k) plans are common among private-sector employers; 403(b) plans are generally available through public schools and eligible tax-exempt organizations.
- Employee contributions: Both plans have annual IRS limits that are adjusted periodically.
- Catch-up contributions: Both can provide age-based catch-up contributions, while some 403(b) participants may qualify for an additional 15-year-service catch-up.
- Employer matching: Either type of plan may offer matching contributions.
- Investment choices: The available investments depend on the individual employer's plan.
- Fees: Costs vary by plan and should be compared directly.
- Roth option: Both types of plans can offer Roth contributions when the employer's plan includes the feature.
How to Choose Between a 401(k) and a 403(b)
For many employees, there isn't actually a choice between the two. Your employer determines which type of retirement plan it sponsors.
If you have access to only one, the more useful question is whether you are taking advantage of the features available in that plan.
If you have access to multiple retirement plans—for example, because you work for more than one eligible employer—compare the plans based on their actual features.
Consider:
- Employer matching contributions
- Investment choices
- Investment expenses
- Administrative fees
- Traditional versus Roth contribution options
- Vesting requirements
- Loan provisions, if important to you
- Withdrawal and rollover options
What About the Four Percent Rule?
Saving money in a 401(k) or 403(b) is only one part of retirement planning. Eventually, those savings may need to become retirement income.
The Four Percent Rule is a commonly discussed retirement-withdrawal guideline. It is based on historical market analysis and is not a guarantee that withdrawing 4% every year will make a portfolio last throughout every possible retirement.
Your appropriate withdrawal strategy can depend on retirement age, portfolio allocation, inflation, market returns, taxes, spending needs, other income sources, and how long you live.
This is why it can be useful to look beyond the account balance and model how retirement savings could translate into income over time.
Fun Facts About 401(k) and 403(b) Plans
- The name "401(k)" comes from Section 401(k) of the U.S. Internal Revenue Code.
- The 403(b) has a longer history than the 401(k); 403(b) arrangements were established in 1958, while the modern 401(k) rules were created later.
- Both 401(k) and 403(b) plans can offer Roth contributions, allowing eligible employees to make after-tax contributions and potentially receive qualified tax-free distributions in retirement.
- Some long-service 403(b) participants can qualify for a special $3,000 catch-up contribution based on years of service with the same eligible employer.
- Plan fees and investment choices can vary substantially within the same plan type, so comparing the actual plan documents can be more useful than simply comparing "401(k)" with "403(b)."
Conclusion
The difference between a 401(k) and 403(b) is primarily about the type of employer that can sponsor the plan and the rules that apply to each arrangement. Both can provide powerful ways to save for retirement, and both can offer traditional and Roth contributions, employer contributions, and tax advantages.
The specific plan matters more than the label. Investment choices, fees, employer matching, vesting, and withdrawal provisions can differ substantially from one employer to another.
And remember that building retirement savings is only half the equation. At retirement, you also need to determine how your accumulated savings will work alongside Social Security, pensions, and other income sources.
Retirementize can help you look at the bigger picture by modeling retirement savings alongside other income sources and projecting how your retirement income may change over time.
