The 401(k) is nearly synonymous with retirement savings in the U.S., although it's certainly not the only workplace plan that offers powerful tax advantages.
So what, exactly, is the difference between 401(k) and 403(b) plans? While they may look nearly identical at first glance, there are a few important distinctions. Here's a look at who's eligible for each one and how they compare.
A brief overview of 401(k) & 403(b) plans
Whether your employer offers a 401(k) or a 403(b) depends on the type of organization you work for.
401(k)sare typically offered by for-profit businesses. 403(b)sare geared toward tax-exempt employers such as public schools and universities, nonprofit hospitals, churches and charitable organizations.
The basic concept of both plans is similar. Like all other types of retirement plans, they fall into an income tax bucket of either
Traditional 401(k) & 403(b)s
A traditional 401(k) or 403(b) is the most common plan type and falls into the "tax later" category. This means that they are funded with pretax dollars through payroll deductions during your working years, and taxed only at the point of withdrawal in retirement. Since contributions are made with pre-tax dollars, they aren't included in and may reduce your taxable income.
The bottom line: A traditional 401(k) or 403(b) may be a good option if you feel you've hit your peak earning years and you may be in a lower tax bracket in retirement.
Roth 401(k)s & 403(b)s
Both 401(k) and 403(b) plans may offer Roth versions, which changes the tax advantage. Instead of investing pre-tax money, you contribute dollars that you've already paid tax on so you won't have an additional tax liability down the road. You can withdraw your funds (contributions and earnings) tax-free with a qualified distribution after reaching age 59½.1 The ability to withdraw earnings tax-free puts these Roth accounts into the "tax never" bucket. However, because contributions are made with after-tax dollars, your taxable income won't benefit from potential reductions.
Comparing 401(k) & 403(b) plans
While 401(k) and 403(b) plans have similar rules, there are some important distributions the following areas:
Investment options Contribution limits Employer matching funds Hardship withdrawals Details of loans & repayments Required minimum distributions (RMDs)
- 401(k)s also may allow the purchase of the organization's own shares if it's a publicly traded company.
- 403(b) plans may also offer
annuitiesas an investment option. Check your employer's plan for details.
The amount you can put into your 401(k) or 403(b) account is the same regardless of which plan your employer offers. Plus, if you're age 50 or older, both plans provide a
- 2023 contribution limit: $22,500
- 2023 catch-up limit: $7,500
403(b)s have a separate catch-up rule for employees with at least 15 years of service at the same organization. The
The Secure Act 2.0 & catch-up contribution changes in 2025
Thanks to the
A perk of both plans is that employers often will match some or all of your contributions. Your organization might contribute dollar-for-dollar of what you kick in up to a certain percentage of your salary. Or they might match a percentage of your total allocation — say, 50% of your contributions — up to a limit. If you're not putting enough money into your account to maximize the employer contribution, you're leaving money on the table.
Another similarity between 401(k)s and 403(b)s: The employer is allowed—though not required—to allow hardship withdrawals for workers contributing to the retirement plan. If employers want to offer them, they need to have clear, written guidelines for what's allowed and what's not.
They have to abide by IRS rules, which state that hardships have to be the result of an "immediate and heavy financial need" that is meant as a last resort. That may include situations like these:
- Medical expenses
- Higher education costs
- The purchase of a primary residence
- Funeral costs
Also, starting in 2024, the
Even if you meet your employer's criteria, the money you pull out because of a hardship withdrawal still may be subject to income taxes and a 10% early withdrawal penalty. It also sets back your retirement savings. Therefore, you'll want to exhaust all other options before moving forward.
Loans & repayment
Both retirement plans also allowed to offer
While loans have several appealing features, it's important to weigh the pros and cons carefully. Typically, employees have to pay back the loan within five years, although that may be extended if you're using the funds to purchase a primary residence. The loan requirements will require that you pay interest—generally a percentage point or two over the prime rate—but unlike traditional loans, this "fee" goes into your account. And, while you're paying yourself back at a modest rate of interest, the money you've borrowed may not be keeping up with the return of the market.
How do loans differ from hardship withdrawals?
One of the benefits of a loan versus a hardship withdrawal is that you don't have to worry about incurring income taxes or an early withdrawal penalty if you pay yourself back in a timely manner. But there's a caveat: If you fall behind on your repayment, your employer could put your loan into default and the overdue amount is treated as an early distribution. And if you leave the employer for any reason, the employer will typically require you to pay off the loan balance within 60-90 days. If you don't pay the balance within this timeframe, you may be subject to penalties and taxes.
Required minimum distributions (RMDs)
Whether you participate in a 401(k) or 403(b), the IRS doesn't let you hold off on withdrawing from your account for as long as you'd like. Once you reach age of your required beginning date (between age 73-75 depending on your birthdate), you have to start taking
If 401(k) plans and their public-sector cousin, the 403(b), seem remarkably similar, that's because they are. Both offer tax benefits that can significantly increase your net return. If your employer offers matching funds, these accounts become an even more powerful way to build long-term assets.
If you're unsure how these plans may fit into your overall financial plan or which investments are right for your needs,