Is a 403(b) a 401(k)? A Comparison of the Plans

Employer-sponsored retirement plans serve as a primary vehicle for individuals to save for their future, yet the distinctions between various plan types can often lead to confusion. Among the most common are the 401(k) and 403(b) plans, both designed to help workers accumulate wealth for retirement with specific tax advantages. While they share fundamental goals, their origins, structures, and certain operational rules differ. This overview clarifies their differences and similarities.

Understanding the 401(k)

A 401(k) plan is a retirement savings arrangement established by an employer for its employees. These plans are predominantly offered by private-sector, for-profit companies.

Employees contribute a portion of their paycheck directly into the plan, often on a pre-tax basis, which reduces their current taxable income. Alternatively, some plans offer a Roth 401(k) option, where contributions are made with after-tax dollars, allowing for tax-free withdrawals in retirement.

Funds within a 401(k) account grow tax-deferred. Many employers enhance this benefit by offering matching contributions.

The investment options within a 401(k) are typically selected by the employer and managed by financial services firms. Common choices include mutual funds, such as index funds, stock funds, bond funds, and target-date funds.

Understanding the 403(b)

The 403(b) plan, often referred to as a Tax-Sheltered Annuity (TSA) plan, is a retirement savings vehicle tailored for employees of public schools, colleges, universities, and certain tax-exempt organizations, including churches and charitable entities.

Similar to a 401(k), contributions to a 403(b) are typically made through payroll deductions and can be on a pre-tax basis, leading to tax-deferred growth of investments. A Roth 403(b) option is also available in many plans, allowing for after-tax contributions and tax-free qualified distributions in retirement.

Employer contributions, including matching funds, are possible in 403(b) plans, though their prevalence can vary by organization. Historically, 403(b) plans primarily offered annuities as investment vehicles. However, current regulations allow for a broader range of options, with mutual funds now commonly available alongside annuities. The specific investment choices provided depend on the employer’s plan design, with selection determined by the employer.

Key Similarities and Differences

While both 401(k) and 403(b) plans serve as tax-advantaged retirement savings vehicles, they possess distinct characteristics. The most fundamental difference lies in the type of organization that typically offers each plan: 401(k)s are generally sponsored by for-profit corporations, while 403(b)s are provided by non-profit organizations, public educational institutions, and certain religious entities. This distinction affects various aspects of the plans.

Regarding investment options, 401(k) plans often present a broader array of choices, including mutual funds, exchange-traded funds (ETFs), and in some instances, individual stocks or bonds. In contrast, 403(b) plans traditionally focused on annuities and now commonly include mutual funds. This difference in available products can influence the diversification and potential growth strategies for participants.

Contribution limits for both plans are largely aligned, as determined by the Internal Revenue Service (IRS). For 2025, employees can contribute up to $23,500 to either a 401(k) or a 403(b). An additional “catch-up” contribution of $7,500 is permitted for individuals aged 50 and over, increasing their total elective deferral limit to $31,000. A unique provision for 403(b) plans is the “15-year rule,” which allows employees with 15 or more years of service with the same employer to contribute an extra $3,000 per year, up to a lifetime maximum of $15,000, though not all plans offer this. The total combined contributions from both employee and employer are capped at $70,000 for 2025, or $77,500 for those aged 50 or older.

Withdrawal rules for both 401(k) and 403(b) plans are generally similar. Distributions taken before age 59½ are typically subject to a 10% early withdrawal penalty, in addition to regular income taxes, unless a specific exception applies. One common exception is the “Rule of 55,” which permits penalty-free withdrawals from the plan of the last employer if separation from service occurs in or after the calendar year the employee turns 55, or age 50 for qualified public safety workers. Both plan types also typically require minimum distributions to begin at age 73.

Both plans may allow participants to take loans from their vested account balances, subject to specific plan rules. Generally, the maximum loan amount is the lesser of 50% of the vested account balance or $50,000, with a standard repayment period of five years, which can be extended for a primary residence purchase.

Finally, the regulatory framework differs. 401(k) plans are broadly governed by the Employee Retirement Income Security Act of 1974 (ERISA), which sets standards for fiduciary responsibility, reporting, and participant protections. Many 403(b) plans, particularly those sponsored by public schools and churches, may be exempt from certain ERISA provisions, especially if employer involvement is limited. However, if a 403(b) employer makes contributions, the plan may become subject to ERISA rules.

Navigating Your Options

Understanding the nuances of 401(k) and 403(b) plans can help individuals make informed decisions about their retirement savings. If your employer offers only one type of plan, the primary consideration should be to participate, particularly to take advantage of any employer matching contributions, which effectively provide an immediate return on your investment. Maximizing these contributions is a sound financial strategy for retirement accumulation.

Individuals who are eligible for both a 401(k) and a 403(b) plan, such as those who work for both a for-profit and a non-profit organization, can contribute to both. It is important to note that the annual employee elective deferral limit applies across all plans in which you participate. Evaluating the specific features of each plan, including investment options, fees, and the presence and generosity of employer contributions, can guide your decision on where to allocate your contributions. Regardless of the plan type, consistently contributing, diversifying investments, and understanding any associated fees are important steps toward building a secure retirement.