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

Employer-sponsored retirement plans, such as 401(k)s and 403(b)s, serve as tools for individuals to accumulate savings for their post-career years. These plans offer tax advantages and structured approaches to long-term financial growth. Understanding the distinctions between a 401(k) and a 403(b) is important for navigating retirement savings options. This article clarifies the differences and commonalities of these two retirement vehicles.

Key Differentiating Factors

A key distinction between 401(k) and 403(b) plans lies in the types of organizations that offer them. 401(k) plans are sponsored by for-profit companies across various industries. Conversely, 403(b) plans are offered by non-profit organizations, including public education institutions, hospitals, charitable organizations, and religious entities. This difference in employer type shapes plan characteristics.

The regulatory framework also separates these two plan types. Most 401(k) plans are subject to the Employee Retirement Income Security Act of 1974 (ERISA), a federal law establishing standards for private sector retirement plans. ERISA imposes requirements for fiduciary responsibilities, reporting, disclosure, and participant protections, ensuring that plan assets are managed prudently and in the participants’ best interests.

Many 403(b) plans are subject to ERISA, but some, particularly those sponsored by governmental entities or churches, are exempt. Certain 501(c)(3) organizations may also operate non-ERISA 403(b) plans if employer involvement is minimal, often limited to facilitating employee salary deferrals. Non-ERISA plans do not have to comply with certain ERISA requirements, such as fee disclosure or annual Form 5500 filing obligations.

Investment options differ between the two plans. 401(k) plans provide a selection of mutual funds, exchange-traded funds (ETFs), and sometimes company stock. 403(b) plans historically offered investment choices primarily through annuity contracts, though mutual fund options are now common. Investment products available are determined by the employer and influence investment flexibility and potential returns.

Common Features and Rules

Despite differences, 401(k) and 403(b) plans share many core features and rules. Both plan types permit employees to make pre-tax contributions, which grow tax-deferred until withdrawal in retirement. Both also offer a Roth option, allowing after-tax contributions in exchange for tax-free qualified withdrawals during retirement. This dual tax treatment provides flexibility based on an individual’s tax situation.

Annual contribution limits for employee deferrals are the same for both plans. For 2025, individuals can contribute up to $23,500 to either a 401(k) or 403(b). For those aged 50 and over, an additional catch-up contribution of $7,500 is permitted.

Beyond employee contributions, the total combined contributions from both employee and employer are subject to an overall limit. For 2025, this limit stands at $70,000, or $77,500 for participants aged 50 and older. This combined limit applies to all defined contribution plans maintained by an employer. Many plans also permit participants to take loans against their vested account balances, requiring repayment with interest over a set period.

Both plans allow for hardship withdrawals under specific circumstances, such as unreimbursed medical expenses or costs for a primary residence. These withdrawals are subject to ordinary income tax and may incur an early withdrawal penalty if the participant is under age 59½. Unlike loans, hardship withdrawals are not repaid to the plan.

Participants in both 401(k) and 403(b) plans are subject to Required Minimum Distributions (RMDs). These distributions must begin by April 1 of the year following the calendar year in which the participant reaches age 73. Roth 401(k) and Roth 403(b) accounts are exempt from RMDs for the original account owner during their lifetime.

Portability and Rollover Options

Individuals often change employers, making portability of retirement savings a consideration. Funds from a 401(k) can be rolled over into a 403(b), and vice-versa, when changing jobs or consolidating accounts. These funds can also be rolled into an Individual Retirement Account (IRA), either a Traditional or Roth IRA.

A direct rollover is the most straightforward method for moving retirement funds, transferring them directly from one plan administrator to another. This avoids taxes or penalties, preserving the tax-deferred or tax-free status of savings. It ensures the money never passes through the participant’s hands, minimizing tax complications.

An indirect rollover involves the participant receiving a check for the distribution, which must then be deposited into a new qualified retirement account within 60 days. A drawback of an indirect rollover is the mandatory 20% federal tax withholding from the distribution. To complete the rollover and avoid taxes and penalties, the participant must deposit the full original amount, including the withheld 20%, into the new account within 60 days. If the full amount is not redeposited, the unrolled portion is treated as a taxable distribution and may be subject to early withdrawal penalties.

Consolidating retirement accounts through rollovers offers several benefits. Managing a single account is simpler than overseeing multiple accounts, providing a clearer financial picture. Consolidation may lead to reduced administrative fees and broader or more cost-effective investment options compared to older, smaller employer plans. Having all savings in one place can simplify tracking Required Minimum Distributions and managing beneficiary designations.