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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 powerful tax advantages. Millions of workers invest through other retirement accounts, including the widely used 403(b).

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)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 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.

The bottom line: A Roth 401(k) or a Roth 403(b) may be a good option if you feel you haven't yet hit your peak earning years and believe 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, there are some important distributions the following areas:

Investment options

Employees are typically 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 may also offer annuities as an investment option. Check your employer's plan for details.

Contribution limits

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 an additional money on top of the annual contribution limit:

  • 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 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, starting in 2025 participants turning 60, 61, 62 or 63 during that calendar year, the client can do the regular catchup plus an additional amount limited to $10,000 or 150% of the dollar amount which would be in effect under such clause for 2025 for eligible participants.

Matching funds

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.

Hardship withdrawals

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.

Loans & repayment

Both retirement plans also allowed to offer loans, which represent another option for employees in dire straights financially. These plans can provide loans of up to 50% of the employee's vested balance or $50,000, whichever is less.

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 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.)

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.