Which Is Better: a 401(k) or a 403(b) Plan?

Employer-sponsored retirement plans play a significant role in an individual’s long-term financial security. Among the various options available, 401(k) and 403(b) plans are two prevalent types designed to help individuals save for their post-career years. Understanding the mechanics and distinguishing features of these plans can guide informed decision-making regarding retirement savings.

Understanding 401(k) Plans

A 401(k) plan is a defined contribution retirement vehicle typically offered by for-profit companies. Employees contribute a portion of their pre-tax salary, which can reduce their current taxable income, or they can choose to contribute to a Roth 401(k) with after-tax dollars. The funds within the plan grow tax-deferred, meaning taxes are not paid until withdrawal in retirement.

Employers enhance these plans by making contributions, which can include matching a percentage of employee contributions or providing profit-sharing contributions regardless of employee deferrals. Investment options within a 401(k) commonly include a selection of mutual funds, and often feature target-date funds that automatically adjust asset allocation over time.

Withdrawals from a 401(k) are generally intended for retirement. Penalty-free distributions typically begin at age 59½. Required Minimum Distributions (RMDs) generally commence at age 73, requiring participants to begin withdrawing funds from their traditional 401(k) accounts. However, Roth 401(k) accounts are not subject to RMDs for the original owner.

Understanding 403(b) Plans

A 403(b) plan is a defined contribution retirement plan primarily available to employees of public schools, colleges, universities, hospitals, and certain tax-exempt organizations, such as 501(c)(3) non-profits. Similar to 401(k)s, employees can make pre-tax contributions, lowering their current taxable income, or contribute to a Roth 403(b) using after-tax dollars. The investments grow tax-deferred until retirement.

Employers sponsoring 403(b) plans may also contribute to their employees’ accounts through matching contributions or non-elective contributions. Investment options in 403(b) plans often include mutual funds, target-date funds, and annuity contracts. The range of investment choices is determined by the employer and plan provider.

Distributions from a 403(b) plan are generally penalty-free after age 59½. Required Minimum Distributions from traditional 403(b) accounts generally begin at age 73. Roth 403(b) accounts are exempt from RMDs for the original account holder.

Comparing 401(k) and 403(b) Features

The primary distinction between 401(k) and 403(b) plans lies in the types of organizations that offer them. 401(k)s are sponsored by for-profit companies, while 403(b)s are provided by non-profit entities like educational institutions and hospitals. This difference in employer type influences some aspects of the plans.

Employee contribution limits for both 401(k) and 403(b) plans are generally the same. For 2025, the standard employee deferral limit is $23,500. Individuals aged 50 and older can make an additional catch-up contribution of $7,500. Furthermore, a new provision for 2025 allows those aged 60 to 63 to contribute an enhanced catch-up amount of $11,250, totaling $34,750, if their plan permits. 403(b) plans may also offer a unique 15-year rule catch-up contribution for long-serving employees, allowing an additional $3,000 per year up to a lifetime maximum of $15,000.

Employer contributions in both plan types typically include matching contributions, where the employer contributes a percentage of the employee’s deferrals. Some employers may also make non-elective or profit-sharing contributions regardless of employee participation. The total combined employee and employer contribution limit for both plan types for 2025 is $70,000, or $77,500 if the employee is age 50 or older.

Investment options vary by plan and provider. Both 401(k)s and 403(b)s commonly offer mutual funds and target-date funds, with 403(b)s also potentially including annuities. The specific investment choices and associated fees vary significantly by plan and provider.

Both plan types generally allow for loans and hardship withdrawals, though specific rules can vary by plan. For loans, participants can typically borrow up to 50% of their vested account balance, with a maximum of $50,000, whichever is less. Repayment periods are generally five years. Hardship withdrawals are permitted for immediate and heavy financial needs, such as medical expenses, home purchase, or funeral costs, but are subject to income tax and a potential 10% penalty if the participant is under age 59½. Unlike loans, hardship withdrawals are not repaid.

Funds from both 401(k) and 403(b) plans can typically be rolled over into other qualified retirement accounts, such as an Individual Retirement Account (IRA) or another employer’s plan, upon leaving employment. This flexibility allows individuals to consolidate their retirement savings or choose different investment options.

Factors for Your Retirement Planning Decision

When evaluating retirement plans, the presence and generosity of employer contributions are important considerations. An employer matching a portion of your contributions provides a direct, immediate return on your savings. Understanding the vesting schedule for employer contributions is also important, as it determines when those funds truly become yours, even if you leave the company.

The range and quality of investment options within a plan should align with your personal risk tolerance and financial goals. A plan offering diverse, low-cost investment choices can support long-term growth. Reviewing the fee structure of the plan, including administrative fees and investment expense ratios, is prudent as high fees can erode returns over time.

Ultimately, the most suitable retirement plan depends on your individual employment situation and the specific features offered by your employer’s plan. While contribution limits are largely standardized, differences in employer contributions, investment selection, and plan fees can impact your overall retirement savings trajectory.