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

403(b)s and 401(k)s are both employer-sponsored retirement accounts, but there are a few differences between them.

Chris Scott

Contributing Writer at Tally

December 15, 2021

When it comes to retirement savings, you have a few options available. Depending on your finances, tools like traditional and Roth IRAs could potentially have a place in your retirement plan. There are also employer-sponsored retirement plans, like a 403(b) or 401(k). 

Confusingly named, both offerings may appear to be a jumbling of letters, numbers and punctuation. While they share similarities, 403(b)s and 401(k)s do have a few distinguishing differences. 

In this article, we’ll provide:

  • A breakdown of 403(b) vs. 401(k) 

  • How they both work and the main differences between them

  • Who may be better suited for each plan

What is a 403(b), and how does it work? 

According to the Internal Revenue Service (IRS), a 403(b) plan “is a retirement plan offered by public schools and certain 501(c)(3) tax-exempt organizations.” Employers may also refer to this type of retirement account as a tax-sheltered annuity plan. 

Generally speaking, there are three types of qualified organizations authorized to offer this type of plan: 

  1. Public schools 

  2. 501(c)(3) tax-exempt organizations, otherwise known as nonprofit organizations, not-for-profit companies or charities 

  3. Churches 

If your employer offers this as a retirement savings option, you can elect how much of your paycheck you’d like to go into the account, up to a certain limit. More on that below. 

Companies may find 403(b) plans attractive because they are not subject to regulations set forth in the Employee Retirement Income Security Act (ERISA). However, this means that employers are not able to make contributions to the account on behalf of employees. Employers could elect to make matching contributions, though they would then be subject to ERISA regulations.

What is a 401(k), and how does it work? 

According to the IRS, a 401(k) plan “is a feature of a qualified profit-sharing plan that allows employees to contribute a portion of their wages to individual accounts.” Contributions are considered “elective salary deferrals,” meaning contributions are tax-deductible. 

If your employer offers a 401(k) plan, you may be able to choose to fund a Roth 401(k) option. If you choose a Roth option, you put net earnings in, meaning you make post-tax contributions. Your earnings grow tax-free, and you will not have to pay taxes when you withdraw your funds.

On the other hand, with a traditional 401(k), your contributions are made pre-tax and you’ll have to pay taxes when you withdraw your funds.

403(b) vs. 401(k): What are the main differences? 

When looking at 403(b) vs. 401(k), there are a few comparison points. Both are employer-sponsored plans. 403(b)s are reserved for employees of certain organizations, while 401(k)s are more widely used. This difference is obvious, but here are a few others worth mentioning. 

Catch-up contributions 

The maximum annual contribution for employer-sponsored retirement accounts is $20,500 as of 2022. This is the case for both 403(b)s and 401(k)s. However, there is a key difference between them when it comes to catch-up contributions. 

A catch-up contribution is a provision that allows employees to contribute $6,500 to their plan on top of the standard $20,500 limit once they reach age 50. Employees can make these contributions to either type of plan without an issue. 

There is an additional provision that allows those with a 403(b) plan to add even more funds. If an employee has at least 15 years of service with the company, they can add an additional $3,000 per year. The employer needs to approve the contribution. 

Investment options

Investors considering 401(k)s will find that they typically have more investment options than they would with 403(b)s. A 401(k) can accept any type of investment, like index funds and exchange-traded funds (ETFs). 

A 403(b), however, is only acceptable for mutual funds and annuities. Typically though, 403(b)s are annuity-heavy and are administered by insurance companies, not investment firms.

Also, while there are Roth 401(k) options available, this is not the case for 403(b)s. 

Administrative fees 

Administrative fees, or expense ratios, are the amount that you pay for your provider to run the fund. Typically, expense ratios tend to be lower with 403(b) accounts than they are with 401(k) accounts. The differences between them are not terribly drastic and vary from provider to provider, but it’s worth noting. 


Who should be considering these employer-sponsored accounts? 

When it comes to comparing 403(b) vs. 401(k), you likely won’t have to make much of a choice. These retirement accounts are offered by employers — though they are not legally required to offer them. 

The type of retirement account offered depends on the type of industry you work in, so you don’t have much say in which type of account your employer offers if they choose to do so. 

Having said that, it’s a good idea to participate in your employer-sponsored plan if it’s available, no matter if it’s a 403(b) or a 401(k). For one, the contribution limits for these accounts are much higher than those for a traditional or Roth IRA. 

The maximum annual contribution for traditional and Roth IRAs is a combined $6,000. The maximum annual contribution for employer-sponsored retirement accounts is $20,500 as of 2022. 

There are tax advantages that go along with employer-sponsored retirement plans as well. You can deduct your contribution from your taxable income, reducing how much you owe the IRS in income taxes. You will need to pay taxes down the road, though, when you make withdrawals.

Additionally, 401(k)s offer an employer-matching option. This means that your employer can, but is not required to, match your contributions up to a percentage or dollar amount of their choosing. 

Perhaps the best part is that these matching contributions do not count against your $20,500 limit. You could fund up to $20,500 in employee contributions and then add a few hundred or thousand dollars more in employer contributions if they offer matching. As discussed previously, this is more common on 401(k) accounts, though the possibility exists for it to occur with a 403(b). 

Can you have both a 403(b) and a 401(k)?

Yes, it’s possible to have both a 403(b) and a 401(k) account. For instance, perhaps you used to work in a public school, where you first opened a 403(b). Then, your next job was with a private curriculum company, where you opened a 401(k). You kept the accounts separate and did not merge them. In this case, you would have both. 

Additionally, if your employer is eligible to offer a 403(b), it’s possible they may also offer a 401(k). This does not happen frequently, but the option exists. 

If your employer does happen to offer both, or you have both types of accounts based on your previous work experience, you may want to talk with a certified financial planner to figure out the best way to manage your money. You are allowed to max out both accounts per the IRS contribution limits. 

Start on your road to financial freedom today 

When it comes to retirement savings plans, you have many investment options available. Two of the most common employer-sponsored plans are 403(b)s and 401(k)s. 403(b)s are offered by public schools, nonprofits and charities. 401(k)s can be offered by any company. 

As an employee, you may not have much of a choice about which plan you can choose, as it’s dependent on what your employer offers. However, taking time to understand how both operate can put you in the best position for financial success.

Setting yourself up for retirement does not happen overnight. It is the result of patience, diligence and hard work. If you’re looking to start or continue down the path toward financial freedom, be sure to sign up for the complimentary email newsletter from Tally. The newsletter offers financial tips, tricks and resources that you can implement to help improve your personal financial situation.