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403b vs 401k Plans – A Detailed Comparison

403b vs 401k Plan
Published on
July 4, 2024

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What’s the difference between a 403b vs 401k plan? Employees should have a thorough know-how of different retirement employer-sponsored arrangements before they sign up for any. Besides, to build a sound-post retirement life, you should have a well-rounded retirement plan. And by well-rounded, I mean a plan that covers all the aspects of your financial life. Are you eligible for a 403b or a 401k? Or are you not? What are the terms and conditions for these plans? Find out the answer to these questions and everything else you need to know, in this blog.

Key Takeaways!

  • Both 403b and 401k allow participants to save some amount of their salary for their retirement income.
  • Both 403b and 401k allow for annual contributions. Participants can go for either Roth or traditional contributions for both plans.
  • 403b and 401k offers tax benefits and have similar annual contribution limits. Both plans also allow for catch up contributions if you are over 50.
  • The 401(k) plan offers a wider range of investment options while the 403(b) plan typically provides more limited choices.

403b vs 401k Plans. What’s the Difference?

Both 403b and 401k are employer-sponsored retirement plans that help employees achieve financial stability. How so? Well, they allow the participants to save up a part of their annual income for retirement. Also, both these plans offer tax benefits. As a result, you lose less and earn more. 

Did You Know?According to several studies, 61% of Americans have invested in either a 401(k) or 403(b).

Although they serve the same purpose, they differ in a lot of ways. Therefore, having a thorough know-how about the eligibility, different aspects, and advantages is important. This will also help you assess which one is the right one for you. In fact, comparing different retirement plans like 401k vs 403b vs 457b is important before you make a decision. Want to know about 403b vs 401k? I’ve got you covered. Here is a detailed guide on everything you should know about these retirement arrangements.

What is a 403(b) Plan?

To compare 403b vs 401k, we should thoroughly understand what these plans offer. Let’s start with 403(b) retirement arrangements. Well, as aforementioned, it is a tax-deferred plan that involves deducting a certain percentage from your salary and saving it up for your retirement. With no worry of taxes, you can accumulate more money to build your ideal life. Yes, that’s right! This plan allows you to grow your money tax-free.

A 403(b) is a tax-sheltered annuity plan that allows employees to grow their savings for a peaceful retirement by making contributions to their individual accounts. – Internal Revenue Service

Who is Eligible for a 403(b)?

Moreover, employees of non-profit organizations and certain government organizations qualify for it. Let’s go into the detail about who’s eligible for this retirement plan. This includes the employees of:

  • Public schools, state colleges, and universities
  • Tax-exempt organizations under Section 501(c)(3)
  • Churches

Also, you should know that there is a special 403b plan for the workers of church, such as ministers and clergies known as 403(b)9. This plan is designed specifically to benefit the employees of churches. Other employees can include teachers, nurses, professors, librarians, doctors, and any other employee who works in the above-listed organizations.

“With a 403b retirement plan, employees are allowed to make tax-free contributions and let their money grow without deductions. The taxes may be deducted on annual withdrawals.” – Security Benefit

What are the Types of a 403b Plan?

While we are discussing 403b vs 401k, you should know that 403b plan is of two types. Both of these plans offer different benefits to the participants. These plans are:

  • Traditional 403(b) Plan
  • Roth 403(b) Plan

Both of these plans differ in terms of tax regulations. A traditional plan leads to the deduction of taxes on withdrawals. Besides, a Roth 403b includes after-tax contributions. This makes your withdrawals tax-free. Well, if you are wondering which one of these types are better for you, let me tell you. A traditional 403b plan is suitable for people who fall under a high-salary bracket. Besides, the Roth version is suitable for people with low salaries who expect to be in a higher salary bracket as they near retirement. To make the right decision, it is always better that you consult a retirement planning specialist.

What is a 401(k) Plan?

Let’s move on to the next step of our 403b vs 401k comparison. Named after a section of the U.S. Internal Revenue Code, a 401(k) is an employer-sponsored plan that allows employees to save up a considerable amount for their retirement. Furthermore, it is a defined contribution plan and give employers to match the contributions of employees. In fact, in some cases, the match becomes compulsory. With this plan, the deductions are made automatically from the employee's paycheck.

“401(k) is a defined contribution, employer-sponsored plan. It is a personal pension plan that automatically deducts employee contributions from their paychecks.” – Wikipedia

Who’s Eligible for a 401k?

Because this plan is tax-deferred, it let’s employees save more than they can without it. This may make you wonder: are you eligible for a 401k? Well, you should know that it is a flexible plan. Therefore, it is popular in private sector for both:

  • Non-profit Organizations
  • For-Profit Organizations

However, not everyone can be eligible for it. In fact, there are some limitations regarding the eligibility of employers for this plan. According to the IRS, if you tick off the following, you qualify for this retirement plan:

  • Reached the Age of 21
  • At Least a 1 Year of Service
  • Employees who are a member of certain unions may be excluded
  • Employees who are non-residents in the US may also be excluded
  • Part-time employees qualify for 401k under certain conditions

Moreover, when you can start your retirement plan also depends on your employer. Keep these in mind before you sign up for a 401k. If you are eligible, you should consult and advisor about your financial goals and needs and them start contributing to it. Also, make sure that you completely understand the limitations, complexities and benefits of this plan.

According to Research, Americans contributed an average of 8% or $5339 to their 401k accounts. – Capitalize

What are the Types of a 401k Plan?

Similar to its contender (403b), 401(k) also comes in two types. And because we are discussing 403b vs 401k, talking about the types of 401k plans is also important. Why? Because it will give you an idea on what options you have. Plus, you will be able to assess which one is better for you based on your annual salary and needs. With this plan, you get the options of:

  • Traditional 401k plan
  • Roth 401k plan

If you decide to contribute to a 401k plan, the money is taken out of your paycheck before the application of taxes. As a result, this reduces your taxable income for the year. The tax deduction rather takes place during the withdrawals. On the other hand, contributions are made after tax deductions if you sign up for a Roth 401k. This lets you enjoy tax-free withdrawals.

403b vs. 401k – What Are the Similarities?

Both these 403b and 401k plans are quite similar to each other in a lot of ways. Yes, that’s right! Although they are two different plans but their similarities will amaze you. Both plans are tax-benefitted and both allow their participants to build the life they want to lead. After all, they let them save up a decent amount for retirement. But hey, there’s more you should know; here are some of the major similarities between these two plans:

• Tax Benefits

The main thing common about these plans is they both offer tax advantages. After all, most 401(k) and 403(b) plans allow employees to contribute money without it being taxed. This way you can save up more investment each year instead of losing a big chunk of money to taxes.  Because both plans deduct income before the application of taxes, your taxable income is reduced. This way, your taxable income reduces each year. Moreover, both 403b vs 401k plans allow their participants to save up without stressing about taxes. However, you have to pay taxes during withdrawals (in most cases). Also, both plans allow you to choose either traditional or Roth contributions based on your situation.

• Contribution Limits

Another similarity between 403b vs 401k is that they come with similar contribution limits. Yes, that’s right! Both plans follow a similar set of rules when it comes to contributions. Additionally, this means that these plans offer you a similar set of contribution benefits. Here are the contribution limits for both 401k vs 403b:

  • The annual limit for employer contribution is $23000 for 2024
  • Participants above 50 can make catch-up contributions of $7500 annually
  • The total of employee-employer contribution limits to $69000 per year
  • With catch-up contributions, the limit increases to $76500 per year

With the same terms and conditions for contribution, you may be wondering: which plan to choose? Well, to make an informed decision, you can always consult an advisor for financial planning. You can use a 401k or 403b calculator if you want to know your annual retirement income.

• Employer Matching

Both these plans – 403b vs 401k – allow the employers to the employee’s retirement income too. Besides, they allow the option of employer matching. With this move, employers contribute the same amount as the employees. Furthermore, if you utilize it the right way, it can benefit you to a great extent. In fact, you can maximize your contributions with employer matching. Interesting, right? Let’s get into how. For this, you have to contribute the maximum amount from your salary you can. Subsequently, the employer will be contributing the same amount. As a result, you can save up more.

In many retirement arrangements, employers can completely or partially match employees' contributions to a certain percentage of their total salary. – Forbes Advisor

• Penalty on Early Withdrawals

As you must be clear by now, both plans – allow you to save up for retirement. Hence, if you withdraw money from your account before retirement, you have to face a penalty of 10%. This penalty is other than the general income tax that you’ll have to pay on the non-Roth withdrawals. This means, you can withdraw money from these accounts if any emergency arises. But you have to pay a fine.

Important Fact!

Only participants who withdraw from their retirement account before the age of 59½ will have to pay the tax penalty. After you have passed this age, you can qualify for penalty-less withdrawals.

Certain exceptions may lead to exempting you from the payment of penalty. For this, you can consult with a professional advisor or check out the regulations given by IRS.

• Required Minimum Distributions

Because they are subject to Required Minimum Distributions (RMD), these plans allow the IRS to collect on the funds in these retirement accounts. Individuals who fail to withdraw RMD after a certain age will have to pay a significant penalty. Moreover, you should know that the age for start withdrawing your required minimum distributions is 73 years. Besides, withdrawals after this age are important for avoiding tax penalties and to manage your retirement income efficiently. Apart from this, the amount of your RMD is based on two factors: your account balance and life expectancy.

Fast Fact!

Those who fail to withdraw their required minimum distribution will have to pay a 50% excise tax on the amount they were expected to take out.

Let’s explain it in a simpler way. Assume that your RMD for the year is $10000 and you only took out $5000. Therefore, you now have to pay a 50% excise tax on the $5000 you didn’t withdraw.

403b vs 401k – What are the Differences?

Above, we have discussed how similar both these plans – 403b vs 401k – are in terms of contributions, tax benefits, employer matching, and more. But do you know that they are different in so many ways too? Want to know more about what makes them different? Let’s get into it!

• Eligibility Criteria

One of the major differences between these two plans is the types of employees who qualify for each of these. 403b is for the employees of non-profit and government organizations. These includes employees of public schools, churches, hospitals as well as those working in an 501(c)(3) organization. On the other hand, both for-profit and non-profit organizations qualify for 401k. Although workers from both organizations are eligible, there is a criteria that you must fit in. This includes being over 21 years and serving the company.

• Investment Choices

These plans also differ in terms of investment choices. Both 401k and 403b allow you to invest a certain amount from your income into different investment streams. However, the options you have in both plans are not the same. 401k offers a wide range of investment options. So, you can easily choose the one that you find more profitable. Besides, with a 403b plan, the investment options are limited. Here are the options you have:

Investment Choices in 403b vs 401k

403b Plan 401k Plan
  • A variety of Mutual Funds
  • ETFs
  • Other Investments
  • Annuities
  • Mututal Funds

• Catch-Up Contributions

You know by now that both of the retirement arrangements allow participants over 50 to make catch-up contributions. As of 2024, this amount limits to $7500. But do you know that the 403b plan offers special catch-up contributions for its participants? Yes, that’s right! If you are an employee working for an employer for more than 15 years, you can contribute an extra $3000. However, this rule also has a life-time limit of $15000. This means that the 15-year rule allows you to contribute no more than $15000 for a lifetime. Moreover, remember that this contribution is other than the catch-up contribution of $7500.

401k vs 403b comparison chart

So, what’s the difference between 401k and 403b? Well, here is a comprehensive comparison for you to easily skim the similarities and differences between these two plans. With the table below, you can decide for yourself what’s a better option per your needs and retirement goals.

401k vs 403b comparison chart

Factors as of 2024 403b Plan 401k Plan
Eligibility Non-profit & government employees Non-profit and for-profit employees
Contribution Limit $23000 $23000
Early Withdrawal Penalty 10% 10%
Catch Up Contributions $7500 $7500
Special Contributions $3000 for employees working more than 15 years for an employer None
Investment Choices Limited Wide-ranged

401k vs 403b – Which is Better?

If you are an employee seeking a peaceful retirement life, understanding the complexities of these plans is very important. After all, these are some of the most commonly offered plans by employers. We’ve thoroughly discussed the eligibility, benefits, limitations and penalties of both 403b and 401k. Now, it's time to decide which one among these two is better? 403b? Because it allows you special contributions. Or 401k? Because it offers a wide range of investment options. Well, it totally depends on you, your financial needs and the time you have before retiring. Above all, it all depends on the plan your employer is offering. Besides, to make an informed decision, it is always better that you take advice from a 403b or 401k financial advisor.

Quick Question: Can You Contribute to Both 401k and 403b?

Yes, you can! If your employer is offering both 401k and 403b, you can sign up for both. This way, you can save up more for financial security in your retirement. However, you have to follow the limitations for both plans that the Internal Revenue Service has set.

Final Thoughts – 403b vs 401k Comparison

Whether 403b or 401k, whatever plan you choose, you can use it as your roadmap to the destination of a financially stable retirement. Undoubtedly, your retirement is the golden years of your life. And you deserve to enjoy them to the fullest. With an adequate amount saved up, you can live the way you want. From your covering basic needs to your fulfilling your dreams, you can do all you want if you have a considerable retirement income by your side. So, if you haven’t invested in a retirement plan yet, YOU ARE MISSING OUT! Start planning for your future now.

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