Which Is Better: 403(b) vs. 401(k)?

Saving for retirement is a fundamental aspect of financial planning. Employer-sponsored retirement plans, such as 401(k) and 403(b) plans, offer structured avenues for employees to accumulate wealth with distinct tax advantages. Understanding these plans is important for optimizing retirement strategy.

Plan Eligibility and Sponsorship

A 401(k) plan is a defined-contribution retirement account primarily offered by for-profit companies. Employees can contribute a portion of their pre-tax or after-tax salary. Employers may also contribute, often through matching contributions or profit-sharing.

In contrast, a 403(b) plan is a retirement savings vehicle designed for employees of public schools, certain tax-exempt organizations under Internal Revenue Code Section 501(c)(3), and religious organizations. Employees can make contributions directly from their paychecks, with potential employer contributions.

For a 401(k) plan, the IRS requires employees to be at least 21 years old and have completed one year of service, often defined as 1,000 hours within a 12-month period. Starting in 2025, the SECURE Act requires 401(k) plans to allow long-term part-time employees (working 500 hours per year for two consecutive years) to participate in elective deferrals.

For 403(b) plans, a “universal availability rule” dictates that if one employee can make elective deferrals, all employees of the organization must be offered the same opportunity. There are specific exceptions to this rule, such as for employees who normally work less than 20 hours per week.

Contribution Rules

Both 401(k) and 403(b) plans enable individuals to contribute a portion of their income towards retirement savings, and these contributions are subject to specific Internal Revenue Service (IRS) limits that adjust periodically. For 2025, the standard employee elective deferral limit for both 401(k) and 403(b) plans is $23,500. This limit applies to the total amount an individual can contribute across all such plans, even if participating in multiple plans through different employers.

Employees aged 50 and over are eligible to make additional “catch-up” contributions. For 2025, this standard catch-up contribution is $7,500, increasing the total possible employee deferral to $31,000 for those aged 50 to 59, and 64 or older. A further enhancement under the SECURE 2.0 Act allows individuals aged 60 to 63 to contribute an even higher catch-up amount of $11,250 in 2025, bringing their total possible contribution to $34,750, if their plan permits.

Beyond employee contributions, employers can also contribute to these plans. In 401(k) plans, common employer contributions include matching contributions, where the employer contributes a certain amount based on the employee’s deferrals, or profit-sharing contributions, which are discretionary and allocated to eligible employees regardless of their own deferrals. These employer contributions are typically made on a pre-tax basis and may be subject to vesting schedules, meaning employees gain full ownership of these funds over time.

For 403(b) plans, employers can make non-elective contributions, which are contributions not tied to employee deferrals, or matching contributions. While employer matching is common in 401(k)s, it is also offered in many 403(b) plans to help attract and retain employees. The total annual contributions from both employee and employer to a 401(k) or 403(b) plan are capped. For 2025, this overall limit is $70,000, or $77,500 for those aged 50 or older, and $81,250 for those aged 60-63, provided the plan allows.

A unique feature for 403(b) plans is an additional catch-up provision known as the “15-year rule.” Employees who have at least 15 years of service with the same eligible employer may be able to contribute an extra $3,000 per year, up to a lifetime maximum of $15,000, provided their average annual contributions have been below a certain threshold. This special catch-up is applied before the age-based catch-up if both are applicable.

Both 401(k) and 403(b) plans commonly offer a Roth contribution option. With a Roth option, employee contributions are made with after-tax dollars, meaning there is no immediate tax deduction. However, qualified withdrawals in retirement, including earnings, are entirely tax-free. This contrasts with traditional contributions, which are pre-tax or tax-deductible, grow tax-deferred, and are taxed upon withdrawal in retirement.