403(b) vs 401(k): What's the Difference?

Financial planning plays a pivotal role when it comes to securing your retirement. Fortunately, if you're employed, there's a chance that you have access to your company's retirement plan. The U.S. Bureau of Labor Statistics recently reported that, in 2022, 69% of private industry workers had employer-provided retirement plans available to them.

While several retirement plans are available on the market, the two most common employer plans to help build your nest egg are 403(b) and 401(k) plans. Ultimately, you likely won't have a choice between the two: 403(b) plans are very similar to 401(k) plans but they are offered by tax-exempt organizations, such as hospitals, schools, churches and nonprofits, while 401(k) plans are offered by for-profit companies.

Both 403(b) and 401(k) plans may offer tax advantages and serve the purpose of helping you save for your retirement. However, they differ not just in what organizations offer them, but in terms of investment options too.

We'll help you understand the differences below.


What Are 401(k) Plans?

A 401(k) plan is an employer-sponsored retirement account that allows you to contribute a portion of your paycheck before taxes are deducted. This means you pay less in taxes now, so that you have access to more of your wages to invest and grow over time.

When you're ready to retire and withdraw money from your 401(k), which you can do without penalty anytime after the age of 59½, you'll pay taxes on the income received from the account then just as you do currently on your employment income.

This may reduce your overall tax burden, however, since you'll likely be in a lower tax bracket because you are living on a fixed income during retirement.

Don't Forget About Required Minimum Distributions

Along with an age limit on when you can start taking distributions from your 401(k), you're also required to start taking distributions from your account when you reach age 73. The IRS mandates that you start withdrawing a certain amount from your 401(k) at this age to ensure that the tax-deferred savings are eventually taxed as intended.


What Are 403(b) Plans?

If you work for a tax-exempt organization like a hospital, school, church or any other non-profit entity, you might have access to a 403(b) plan. Similar to a 401(k) in its purpose, a 403(b) plan is designed to help you save for retirement through tax-deferred employee contributions.

The benefit of a 403(b) plan for nonprofit employees is the ability to save for retirement while enjoying the same potential tax advantages as a 401(k) plan. By contributing before taxes are deducted from your paycheck, you may be able to lower your taxable income for the year.


The Differences Between 403(b) and 401(k) plans

Both 403(b) and 401(k) plans serve the purpose of helping individuals save for their retirement, offering tax advantages and various investment options.

The most obvious and significant differences between these two plans is the fact that 403(b) plans can only be offered to workers by nonprofits. However, some nonprofits offer employees the option between a 401(k) and a 403(b), making understanding their differences important for these workers.

The two types of plans have some notable differences that could impact your investment choices, employer contributions, costs and additional catch-up opportunities.

Investment Choices

With a 401(k) plan, you will likely have multiple investment choices.

A 401(k) plan may offer an array of investment options including:

  • Stocks.
  • Bonds.
  • Mutual funds.
  • Exchange-traded funds (ETFs).
  • Company-specific stock options (in some cases).

This versatility allows you to tailor your investment portfolio based on your risk tolerance and financial goals, ensuring you have a well-diversified strategy to help protect your 401(k) from a market crash and to potentially maximize returns.

On the other hand, 403(b) plans often offer more limited investment options, commonly confined to annuities and mutual funds. Although these options have the potential to provide a guaranteed income stream during retirement, they might entail higher fees and expenses.

Consequently, participants in 403(b) plans may have less flexibility in diversifying their investments than those in 401(k) plans. This could affect their ability to potentially minimize the effects of volatility on retirement savings.

Employer Matching

Another critical aspect to consider is employer matching contributions. While both plans have the potential for employer matches, 401(k) plans are more likely to offer this benefit. Many for-profit employers offer a match, often up to a certain percentage of your salary.

In contrast, 403(b) plans may have employer contributions that are less common or less substantial. Nevertheless, it's essential to remember that even a modest employer match can still be a valuable addition to your retirement savings account, contributing to the possibility of long-term financial security.


While both 401(k) and 403(b) plans may have administrative fees and expenses, 401(k) plans might have slightly higher costs due to the broader range of investment options and additional services provided by for-profit financial institutions. Meanwhile, 403(b) plans may have lower fees and expenses due to their association with nonprofit entities.

By minimizing costs, you can allocate more funds toward your investments, potentially accelerating the growth of your retirement savings and making your retirement plans more resilient to market fluctuations.

Additional/Catch-up Contributions

Both 403(b) and 401(k) plans allow participants aged 50 and above to make additional "catch-up" contributions, enabling you to save more aggressively as you approach retirement.

However, 403(b) plans offer an extra catch-up opportunity for employees with 15 or more years of service with the same employer, regardless of their age. This is only possible if the employee didn't contribute more than $5,000 each year to the plan.

The 15-year-catch-up provision can be particularly beneficial if you work for a nonprofit organization and wish to ramp up your savings in the final years leading up to retirement.

A Quick Breakdown of 403(b) vs. 401(k) Plans

Employer's StatusFor-profit and nonprofit companies.Non-profit organizations, educational institutions, certain public entities.
Investment ChoicesTypically a wider range of investment options.Often limited to annuities and mutual funds.
Employer MatchingCommonly available.Less common, but some employers offer it.
CostsMay have higher administrative costs.Tend to have lower fees and expenses.
Additional/Catch-up ContributionsGenerally allowed, with catch-up contributions for those aged 50 and above.Additional contributions allowed for employees with 15+ years of service.


401(k) and 403(b) Contribution Limits

As of 2024, the annual contribution limit for both plans is $23,000 for individuals under the age of 50. However, for individuals aged 50 and above, an additional catch-up contribution of $7,500 is allowed, bringing the total to $30,000.


401(k) and 403(b) Withdrawal Rules

When it comes to withdrawing funds from these retirement accounts, there are some similarities between 401(k) and 403(b) plans. Both plans usually allow penalty-free withdrawals after the age of 59 1/2. Withdrawing funds before this age may subject you to a 10% early withdrawal penalty, in addition to federal and state taxes on the money, except under certain narrow circumstances that count as exemptions — such as medical expenses or the death or disability of the account holder.


Which Plan Is Better?

Choosing the better plan for your retirement hinges on your unique circumstances. Both 403(b) and 401(k) plans allow you to save with pre-tax dollars from your salary. However, the 401(k) stands out for its greater investment diversity.

Keep in mind that the retirement plan you're eligible for largely depends on your employer, so you likely do not have the choice to opt for a 403(b) or 401(k). However, if you're in the position to have access to both, remember that the contribution cap remains the same across both plans.


Things to Consider About Retirement Plans

If you're choosing between two job offers, one from a nonprofit and the other from a for-profit company, and the salary and job duties are comparable, it's time to zoom in on the retirement benefits.

Here are three questions to consider in your decision-making process:

Is There an Employer Match?

When it comes to employer contributions, the 401(k) plan typically takes the lead over the 403(b) due to regulatory requirements. Many 401(k) plans may offer employer matches, enticing employees to boost their retirement savings.

On the other hand, while some 403(b) plans do provide employer matches, they may be less common or less substantial. If you find yourself evaluating two job offers—one with a match or a more favorable match and the other without—it could become a crucial factor to consider.

Can I Contribute to Both a 401(k) and a 403(b)?

Yes, but this situation is a rare one.

If your employer offers a 401(k) and a 403(b) plan, you have the opportunity to boost your retirement savings by contributing to both accounts. This investment strategy allows you to diversify your investments and maximize tax-deferred contributions.

While utilizing both plans can be advantageous, it's important to remember that the overall limits on tax-deferred contributions remain the same for each plan.


Plan Your Retirement Journey

Both plans offer benefits, such as pre-tax advantages and opportunities for employer matching contributions, but the differences in investment options, costs and catch-up opportunities may sway your preference.

As you begin your retirement planning journey, consider seeking guidance from a retirement planning professional. Doing so can help you navigate the complexities of these retirement plans and tailor a strategy that aligns with your long-term goals.

One important step in planning for your future is to start saving for retirement as early as possible. Time is a powerful ally in building a substantial retirement nest egg. The earlier you begin contributing to your chosen plan, the more your savings can potentially benefit from compounding growth.

This article is for general information and education only. It is provided as a courtesy to the clients and friends of City National Bank (City National). City National does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors or persons quoted as of the date of the article with no obligation to update or notify of inaccuracy or change. This article may not be reproduced, distributed or further published by any person without the written consent of City National. Please cite source when quoting.

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