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What's the difference between 401(k) & 403(b) plans?

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The 401(k) is nearly synonymous with retirement savings in the U.S., although it's certainly not the only workplace plan that offers tax advantages. Millions of workers invest through other retirement accounts, including the widely used 403(b).

So what, exactly, is the difference between 403(b) and 401(k) plans? While they may look nearly identical at first glance, they have 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)s are typically offered by for-profit businesses.
  • 403(b)s are 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 "tax now," "tax later" or "tax never."

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 you fund them with pretax dollars through payroll deductions during your working years. Those dollars compound and grow tax-deferred over time.

You're taxed only when you take withdrawals in retirement. Since you make contributions with pretax dollars, they aren't included in (and may reduce) your taxable income each year.

  • The bottom line: You may want to consider a traditional version of a 401(k) or 403(b) if you feel you've hit your peak earning years and expect to be in a lower tax bracket in retirement.

Roth 401(k)s & 403(b)s

Your employer may offer a Roth 401(k) or Roth 403(b), which changes the tax advantage. Instead of investing pre-tax money, you contribute dollars you've already paid tax on. Once it comes time to take withdrawals, you won’t have to pay taxes on withdrawals of the contributions. Earnings also are eligible to be withdrawn tax-free.1

The ability to withdraw earnings tax-free puts these Roth accounts into the "tax never" bucket. However, because you make contributions with after-tax dollars, your taxable income doesn't benefit from potential reductions.

  • The bottom line: You may want to choose a Roth version of the plan offered to you if you expect that you haven't yet hit your peak earning years and think you may be in a higher tax bracket in retirement.
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Comparing 401(k) & 403(b) plans

While 401(k) and 403(b) plans have similar rules, they have a few notable distinctions.

Contribution limits are the same for 401(k)s & 403(b)s

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 catch-up provision that allows you to contribute additional money on top of the annual contribution limit:

  • 2023 contribution limit: $22,500
  • 2024 contribution limit: $23,000
  • 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 IRS has a formula for this additional amount, which can go as high as $3,000 a year for certain workers.

    The Secure Act 2.0 & catch-up contribution changes in 2025

    Thanks to the Secure Act 2.0, if you're turning 60, 61, 62 or 63 during that calendar year, you're eligible for more catch-up contributions. You can do the regular catch-up contribution plus an additional amount limited to $10,000 or 150% of the standard contribution limit, whichever is greater.

    Investment options may slightly vary between plans

    Employees typically are offered a preselected menu of investment options for either a 401(k) or 403(b). In both cases, these choices can include index funds, mutual funds and target-date funds.

    • 401(k)s also may allow the purchase of the organization's own shares if it's a publicly traded company.
    • 403(b) plans also may offer annuities as an investment option. Check your employer's plan for details.

    Employers typically offer matching funds for both plans

    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.

    403(b) vesting is typically faster than 401(k) vesting

    When employer-sponsored retirement plans offer matching contributions, the vesting period, or the time an employee must work for an employer to gain ownership of employer-contributed funds, is usually shorter in 403(b) plans compared to the typical 401(k) vesting.

    For example, it's common for a 403(b) plan to offer a three-year vesting schedule, whereas the typical 401(k) vesting period is six years.

    Hardship withdrawals are allowed with either plan

    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 Secure Act 2.0 added another hardship withdrawal for individuals experiencing domestic abuse. Those affected may make hardship withdrawals of $10,000 or 50% of their vested balance, whichever is less. The withdrawal must be made within one year of the abuse and all or part must be repaid within three years to avoid penalty.

    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.

    Both plans allow loans but note repayment rules

    Both retirement plans allow loans, which represent another option if you're experiencing financial hardship. These plans can provide loans of up to 50% of your vested balance or $50,000, whichever is less.

    While loans have several appealing features, weigh the pros and cons carefully. Typically, you 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 requires you to 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 interest rate, 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 promptly. 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 typically requires you to pay off the loan balance within 60 to 90 days. If you don't pay the balance within this timeframe, you may be subject to penalties and taxes.

    Only traditional version of 401(k)s & 403(b)s have 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 required minimum distributions (RMDs). Should you work beyond your required beginning date age, however, that start date is postponed until you retire, as long as the plan document allows for the delay. (Business owners with more than 5% ownership are excluded from this provision.)

    An RMD is no longer required for Roth accounts in employer plans (i.e., Roth 401(k)s and Roth 403(b)s) effective for taxable years beginning in 2024. This allows these assets to keep growing tax-free if you don’t need them at your RMD age.

    401(k) vs 403(b) comparison at-a-glance

    Contribution limits

    2023: $22,500
    2024: $23,000
    Catch-up limit: $7,500

    2023: $22,500
    2024: $23,000
    Catch-up limit: $7,500
    Investment options
    Commonly include mutual funds, index funds and target-date funds
    Commonly include mutual funds, index funds and target-date funds. May include annuities
    Employer match
    Yes, typically
    Yes, typically
    Typically after six years
    Typically after three years
    Hardship withdrawals
    Allowed per IRS guidelines
    Allowed per IRS guidelines
    Yes, typically
    Yes, typically
    Traditional 401(k) has RMDs; Roth 401(k) will not require RMDs starting in 2024
    Traditional 403(b) has RMDs; Roth 403(b) will not require RMDs starting in 2024

    403(b) vs. 401(k): Which is better?

    Typically, you may not have access to both plans since it depends on what your employer offers. However, if your household has multiple earners, such as you and your spouse, you could have access to both and may want to know which is better. Let's dive deeper.

    Is a 403(b) better than a 401(k)?

    403(b) and 401(k) plans share many of the same benefits and features, including contribution limits and tax benefits. Therefore, neither is inherently better overall.

    However, if you or others in your household have the option to contribute to either a 403(b) or a 401(k), the same general rules apply in choosing between them. For example, it's better to contribute to an employer-sponsored plan that offers matching contributions compared to one that doesn't.

    It's also wise to pay attention to investment options and fees. For example, a wider selection of low-cost investments can be better than a plan with few choices or investment options with higher expenses.

    Can you contribute to both a 401(k) & a 403(b)?

    Yes, you can contribute to both a 401(k) and a 403(b). But you have some considerations and limitations to be aware of. For example, if you contribute to both a 401(k) and a 403(b), the total combined contributions to both plans in a given tax year can't exceed the annual contribution limit set by the IRS. This means if you had access to both plans in 2024, you could contribute no more than a total of $23,000 combined contributions.

    The takeaway

    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, a local Thrivent advisor can lend you a hand.

    1Distributions of earnings are tax-free as long as the first contribution or conversion to your Roth 403(b) or Roth 401(k) is at least five years old and one of the following requirements is met: (1) you are at least age 59½; (2) you are disabled; (3) you are purchasing your first home ($10,000 lifetime maximum); or (4) the money is being paid to a beneficiary.

    Thrivent and its financial advisors and professionals do not provide legal, accounting or tax advice. Consult your attorney or tax professional.