What Is the Difference Between a 401(k) and a 403(b)?

Employer-sponsored retirement plans are crucial for saving for the future. Among the most common are 401(k)s and 403(b)s, which offer distinct features and cater to different employment sectors. Both serve as tax-advantaged retirement savings vehicles, but their structures and applicability vary. This overview clarifies the differences between them.

Fundamental Characteristics and Eligibility

A 401(k) plan is a defined contribution retirement plan established under Internal Revenue Code (IRC) Section 401(k). These plans are predominantly offered by private, for-profit companies to their employees. Employees contribute a portion of their pre-tax wages, or after-tax in the case of a Roth 401(k), directly from their paychecks. Funds grow tax-deferred until distribution in retirement.

In contrast, a 403(b) plan, also known as a tax-sheltered annuity (TSA) plan, falls under IRC Section 403(b). These plans are specifically designed for employees of public schools, certain 501(c)(3) tax-exempt organizations (such as hospitals and charities), and some religious entities. Like 401(k)s, 403(b)s allow employees to save for retirement through payroll deductions, with contributions and earnings growing tax-deferred. The primary distinction lies in the type of employer that can sponsor each plan.

Contribution Rules and Investment Options

Both 401(k) and 403(b) plans share similar employee contribution limits, which are adjusted periodically by the IRS. For 2025, employees can contribute up to $23,500 through salary deferrals to either a 401(k) or a 403(b) plan. This limit applies whether contributions are made on a pre-tax basis or to a Roth account option.

For individuals aged 50 and over, additional “catch-up” contributions are permitted to help boost retirement savings. In 2025, the standard catch-up contribution for both 401(k) and 403(b) plans is an additional $7,500, increasing the total employee contribution limit to $31,000 for eligible participants. A higher catch-up contribution of $11,250 is available for those aged 60 to 63 in 2025, if the plan allows, bringing their total to $34,750.

Employer contributions also factor into the overall savings. For 2025, the total combined employee and employer contribution limit for both 401(k) and 403(b) plans is $70,000, or $77,500 for those aged 50 or older. Some 403(b) plans may also offer a special 15-year service catch-up provision, allowing long-term employees to contribute an additional $3,000 per year, up to a lifetime maximum of $15,000, which is not typically found in 401(k)s.

Regarding investment options, 401(k) plans generally offer a broader array of choices, including various mutual funds, exchange-traded funds (ETFs), and sometimes individual stocks and bonds. These plans often provide a range of funds with different risk profiles, from aggressive growth to conservative income. In contrast, 403(b) plans traditionally have more limited investment selections, often restricted to annuity contracts provided by insurance companies and mutual funds held in custodial accounts. While some 403(b) plans have expanded their offerings, the range of investment products can still be narrower compared to many 401(k) plans.

Withdrawal and Distribution Provisions

Accessing funds from both 401(k) and 403(b) plans generally follows similar rules to maintain their tax-advantaged status. Withdrawals made before age 59½ are typically subject to ordinary income tax and a 10% early withdrawal penalty, unless a specific exception applies. Common exceptions to this penalty include withdrawals for unreimbursed medical expenses, qualified higher education expenses, or if the distribution is due to death or disability.

Both plan types may offer provisions for plan loans, allowing participants to borrow against their vested account balance. These loans typically must be repaid with interest within a specified timeframe, often five years, though longer periods may be permitted for the purchase of a primary residence. Failing to repay a plan loan can result in the outstanding balance being treated as a taxable distribution subject to income tax and potential early withdrawal penalties.

Hardship withdrawals are another potential avenue for accessing funds in both 401(k) and 403(b) plans, though these are generally reserved for immediate and heavy financial needs. Such needs might include medical care expenses, costs related to the purchase of a principal residence, or payments to prevent eviction or foreclosure. Hardship distributions are usually taxable and do not need to be repaid, but they do not incur the 10% early withdrawal penalty if they meet IRS criteria.

Required Minimum Distributions (RMDs) apply to both 401(k) and 403(b) plans, mandating that participants begin withdrawing funds from their traditional (pre-tax) accounts once they reach a certain age. Under current rules, RMDs generally start at age 73. These distributions are calculated based on the account balance and the participant’s life expectancy. Failure to take an RMD can result in a significant excise tax on the amount not withdrawn.

Plan Administration and Portability

The administrative oversight of 401(k) and 403(b) plans varies, primarily due to the Employee Retirement Income Security Act (ERISA) of 1974. Most 401(k) plans, offered by private-sector employers, are subject to ERISA, which establishes standards for plan administration, fiduciary duties, and participant protections, including requirements for reporting and disclosure.

Conversely, 403(b) plans offered by public schools and churches are generally exempt from ERISA. Some 403(b) plans sponsored by 501(c)(3) non-profit organizations may be subject to ERISA, depending on the extent of employer involvement, particularly if the employer contributes to the plan. This difference in ERISA applicability can influence the level of regulatory scrutiny and participant safeguards.

Vesting schedules determine when an employee gains full ownership of employer contributions. While employee contributions are always 100% vested immediately, employer contributions typically vest over time. Common vesting schedules for 401(k)s include “cliff vesting,” where full ownership is granted after a specific period (e.g., three years), or “graded vesting,” where ownership increases incrementally over several years (e.g., 20% per year over five years). Vesting schedules are less common in 403(b) plans that do not include employer matching contributions.

Portability options allow individuals to move their retirement savings when changing jobs or nearing retirement. Funds from both 401(k) and 403(b) plans can typically be rolled over into another employer’s qualified retirement plan (such as a new 401(k) or 403(b)) or into an Individual Retirement Account (IRA). A direct rollover, where funds are transferred directly between financial institutions, is often the preferred method to avoid potential tax withholding and penalties. This flexibility helps maintain the tax-deferred status of retirement savings as individuals transition through their careers.