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What are 403(b) & 401(k) Plans?
Both 403(b) and 401(k) plans are employer-sponsored retirement plans designed to help employees save for retirement while enjoying tax advantages. Both are powerful tools employers offer to incentivize saving, allowing contributions to grow tax-advantaged until retirement.
But their availability depends on where you work:
- 403(b) Plans are tax-sheltered annuity plans typically offered by non-profit organizations, public schools, churches, and certain government employers.
- 401(k) Plans are common in private, for-profit companies.
These plans may look similar on the surface, both offer tax-deferred or Roth options, employer contributions, and investment options like mutual funds. But there are subtle, yet important, differences that could make a big impact on your long-term financial goals.
403(b) and 401(k): Key Differences
Here’s a side-by-side look at how the two plans stack up:
| Feature | 403(b) Plan | 401(k) Plan |
| Who Can Offer It | Nonprofits, public schools, and religious organizations | Private, for-profit companies |
| Regulatory Requirements | ERISA rules vary; governmental/church plans often exempt. | Fully governed by ERISA rules |
| Investment Options | Often limited to annuities and mutual funds, sometimes with fewer choices | Typically broader investment options, including mutual funds, ETFs, and target-date funds |
| Employer Contributions | Not required, but often included | Often offered as a percentage match |
| Annual Contribution Limit (for 2025) | $23,500 | $23,500 |
| Age 50+ Catch-Up Contribution Limit (for 2025) | $7,500 (total $31,000) | $7,500 (total $31,000) |
| Age 60-63 "Higher" catch-up contribution (New for 2025) |
$11,250 (total $34,750) | $11,250 (total $34,750) |
| Special 15-year catch-up contribution | Up to $3,000 per year ($15k lifetime cap) | None |
| Administrative Costs | Generally lower if ERISA-exempt | May have higher fees and expenses due to compliance |
| Plan Loans | May be available, terms set by the plan. Governed by IRS rules | Often available, terms set by the plan. Governed by IRS rules |
| Withdrawals | Subject to taxes unless a Roth and a qualified distribution. Tax penalties before 59½ | Subject to taxes unless a Roth and a qualified distribution. Tax Penalties before 59½ |
| Vesting Schedules | Some plans may offer immediate vesting, especially for employee contributions. Employer contributions usually have a cliff or a graded schedule. ERISA-exempt plans may have different rules | Follows ERISA guidelines: employee contributions are always 100% vested. Employer contributions usually have a cliff or a graded schedule. |
Note: If you have a 403(b) and qualify for both catch-up provisions, the IRS requires that the 15-year catch-up be applied first, followed by the age-based catch-up.
Employer Match: A Crucial Retirement Benefit
One of the biggest perks of any retirement plan is the employer match. Ensure to check your Summary Plan Description (SPD) for details.
- 403(b): Some nonprofits offer a match, but many don’t. Those that do may follow a simplified structure or use annuity-based contributions.
- 401(k): Most employers provide a structured match program, such as 50% of the first 6% of your salary.
Taxes: Deferred Now, Pay Later (or Not?)
Both 403(b) and 401(k) plans offer traditional (pre-tax) and Roth (after-tax) options:
- Traditional Contributions: Reduce your taxable income today, but you’ll owe taxes on distributions in retirement. Traditional contributions might be more advantageous if you expect to be in a lower tax bracket in retirement than you are currently.
- Roth Contributions: No immediate tax break, but withdrawals are tax-free in retirement if you meet the requirements. Roth contributions are often favored by those who anticipate being in a similar or higher tax bracket in retirement, or who value tax diversification and the certainty of tax-free withdrawals. Consult your tax advisor to understand if you qualify for tax-free withdrawals.
Understanding your current vs. future tax bracket is key. For many, a Roth 401(k) or Roth 403(b) makes sense when you’re young or in a lower tax bracket.
What Happens When You Change Jobs?
Both 401(k) and 403(b) plans are generally portable. When you leave an employer, you can typically roll over your vested balance into an IRA, a new employer's plan (if allowed), or sometimes leave it in the old plan (if the balance is over a certain threshold). Understand the rollover options and any potential implications.
Final Thoughts
There’s no better choice between the 403(b) and 401(k). Each has its own strengths and regulatory quirks, shaped by the type of employer, the investment choices available, and the match or contribution features.
If you work in a nonprofit or public sector, a 403(b) might be your only option, but it still offers excellent tax benefits. If you’re in the private sector, a 401(k) may come with better employer contributions and broader investment flexibility. However, it all depends on what is offered by the plan.
The right plan for you comes down to what your employer offers. Take a closer look at the features, fees, investment choices, and matching contributions to help make every dollar count for retirement.
Ready to Take the Next Step?
- Obtain Your Plan Documents: Request the Summary Plan Description (SPD) and information on investment options and fees from your HR department or plan administrator.
- Evaluate Employer Contributions: Understand the matching formula and contribute at least enough to get the full match.
- Review Investment Choices: Assess the available funds, their performance, and expense ratios.
- Consider Your Tax Situation: Decide between Traditional and Roth contributions based on your current and projected future income.
- Seek Professional Advice: If you're unsure, a qualified financial advisor can help you analyze your options and create a tailored retirement strategy.
Confused about 403(b) about 401(k)? Discuss options with an advisor. Start Your Free Plan
Source
- IRC 403(b) tax-sheltered annuity plans - Internal Revenue Service (IRS). https://www.irs.gov/retirement-plans/irc-403b-tax-sheltered-annuity-plans
- Choosing a retirement plan: 401(k) plan - Internal Revenue Service (IRS). https://www.irs.gov/retirement-plans/choosing-a-retirement-plan-401k-plan
- Issue Snapshot - 403(b) plans - Catch-up contributions - Internal Revenue Service (IRS). https://www.irs.gov/retirement-plans/403b-plans-catch-up-contributions
