Is a 401(k) and a 403(b) the Same?
Explore the fundamental differences and shared characteristics of 401(k) and 403(b) retirement accounts. Plan your future wisely.
Two common employer-sponsored retirement plans in the United States are the 401(k) and the 403(b). Both facilitate retirement savings, but their structures and the organizations that offer them exhibit distinct characteristics.
Understanding 401(k) Plans
A 401(k) plan is a defined contribution retirement plan primarily offered by for-profit companies in the private sector. This type of plan allows employees to contribute a portion of their pre-tax or after-tax (Roth) salary directly into an investment account. Employers often encourage participation by offering matching contributions, where they contribute a certain amount based on the employee’s deferrals, or through profit-sharing contributions.
The funds within a 401(k) plan are typically invested in a variety of options, commonly including mutual funds, exchange-traded funds (ETFs), target-date funds, and sometimes individual stocks and bonds. Contributions are automatically deducted from an employee’s paycheck, simplifying the saving process and promoting consistent contributions. The growth within the account is tax-deferred, meaning taxes are not paid until funds are withdrawn in retirement.
Understanding 403(b) Plans
A 403(b) plan is a defined contribution retirement plan specifically designed for employees of non-profit organizations, public schools, colleges, universities, and certain religious institutions. Like 401(k)s, 403(b) plans allow employees to contribute a portion of their salary on either a pre-tax or Roth (after-tax) basis. Employers may also contribute to these plans, though employer matching is not universally offered by all non-profit entities.
Investment options within 403(b) plans were limited to annuity contracts. However, mutual funds have also been permitted through custodial accounts. Contributions are made through payroll deductions, and the investments grow tax-deferred until withdrawal, similar to a traditional 401(k).
Shared Characteristics of 401(k)s and 403(b)s
Both 401(k) and 403(b) plans share several characteristics that make them attractive retirement savings vehicles. For 2025, the annual employee elective deferral limit for both types of plans is $23,500. Individuals aged 50 and over are permitted to make additional “catch-up” contributions, increasing their limit by $7,500, for a total of $31,000 in 2025. A new higher catch-up contribution of $11,250 applies for employees aged 60, 61, 62, and 63, bringing their total deferral limit to $34,750 in 2025.
Both plan types offer options for traditional pre-tax contributions, where money is deducted before income tax is applied, and Roth contributions, where after-tax dollars are contributed. Traditional contributions reduce current taxable income and grow tax-deferred, with withdrawals taxed in retirement. Roth contributions do not offer an upfront tax deduction, but qualified withdrawals in retirement are tax-free. Both plans generally permit loans and hardship withdrawals under specific Internal Revenue Service (IRS) rules, though early withdrawals before age 59½ are typically subject to a 10% tax penalty unless an exception applies. Funds from both 401(k)s and 403(b)s can often be rolled over into other qualified retirement accounts, such as an Individual Retirement Account (IRA) or a new employer’s plan, when an individual changes jobs or retires.
Distinguishing Features of 401(k)s and 403(b)s
Despite their similarities, 401(k) and 403(b) plans differ in the types of employers that offer them. 401(k) plans are almost exclusively offered by for-profit private sector companies, ranging from small businesses to large corporations. In contrast, 403(b) plans are specifically designed for public education institutions, such as K-12 schools and universities, and tax-exempt non-profit organizations, including hospitals, charities, and religious groups.
Investment options can also vary between the two plan types. While both may offer mutual funds, 403(b) plans have a historical and often continued emphasis on annuity contracts as investment vehicles. Annuities are insurance products that can offer guaranteed income streams or principal protection features, which may appeal to some savers. 401(k) plans typically offer a broader and more diverse range of investment choices, including various mutual funds, exchange-traded funds, and sometimes individual securities, providing greater flexibility for participants.
A unique feature specific to 403(b) plans is the “15-year rule” for certain long-term employees. This rule allows employees who have at least 15 years of service with the same eligible employer to make an additional catch-up contribution of up to $3,000 per year, up to a lifetime maximum of $15,000. This special provision is separate from the age 50 and over catch-up contributions and is not available in 401(k) plans. Additionally, regulatory oversight can differ; most 401(k) plans are subject to the Employee Retirement Income Security Act (ERISA), which provides strict protections and reporting requirements, whereas some 403(b) plans, particularly those for churches and governmental entities, may be exempt from certain ERISA provisions.