The core difference: who offers each plan

A 401(k) is offered by for-profit companies and some nonprofits. A 403(b) is offered only by public schools, colleges, universities, and tax-exempt organizations like hospitals and charities. The employer you work for determines which plan you have access to — you cannot choose between them.

Both are employer-sponsored retirement savings accounts where you contribute money before or after taxes, depending on the plan type. Both allow your money to grow tax-deferred until you withdraw it. But the rules around how much you can contribute, how the money is invested, and when you can access it differ in ways that matter to your long-term savings.

Key Takeaways

  • A 401(k) is for for-profit companies; a 403(b) is for schools, universities, and tax-exempt organizations.
  • Both plans have the same annual contribution limit for 2024 ($23,500 for workers under 50), but 403(b) plans have a catch-up provision that allows higher contributions in your final three years before retirement.
  • 401(k) plans typically offer a range of mutual funds and stocks; 403(b) plans historically offered annuities but now often include mutual funds as well.
  • Withdrawal rules are similar, but 403(b) plans have a special "403(b)(7) exception" that may allow penalty-free withdrawals in certain circumstances.
  • Both plans allow employer matching contributions, though the structure and generosity vary by employer.

Annual contribution limits and catch-up rules

For 2024, both 401(k) and 403(b) plans allow you to contribute up to $23,500 of your own money per year if you are under age 50. If you are 50 or older, both plans allow an additional $7,500 catch-up contribution, bringing your total to $31,000.

The 403(b) plan has one rule that 401(k) plans do not: the 15-year catch-up provision. If you have worked for your employer for 15 or more years, you may be able to contribute an extra $3,500 per year (up to a lifetime limit of $15,000) on top of the standard limit. This rule applies only to 403(b) plans and only if your employer allows it. Check with your plan administrator to see whether your school or organization offers this option.

These limits change each year based on inflation. The IRS announces new limits in October for the following year, so check your plan documents or your employer's benefits website annually.

How investment options differ

A 401(k) plan typically offers a menu of mutual funds, index funds, and sometimes individual stocks. You choose how to allocate your contributions among these options. The range varies by employer — some offer dozens of choices, others offer fewer.

A 403(b) plan historically offered only annuities, which are insurance products that may provide a stream of income in retirement. Today, most 403(b) plans also offer mutual funds alongside annuities, giving you more choice. However, some smaller organizations still offer annuities only. Ask your plan administrator what investment options are available in your specific plan.

The difference matters because annuities typically charge higher fees than mutual funds, and they work differently — an annuity converts your balance into monthly payments for life, while a mutual fund remains an account balance you control. If your 403(b) offers both, you can usually split your contributions between them.

Employer matching and vesting

Both 401(k) and 403(b) plans allow your employer to match a portion of your contributions. A common match is 50% of the first 6% you contribute — meaning if you contribute 6% of your salary, your employer adds 3%. The exact match formula varies by employer and is spelled out in your plan documents.

Money your employer contributes is subject to a vesting schedule, which determines when that money becomes yours to keep. A common schedule is three-year cliff vesting, meaning you own 0% of the employer match until you have worked there for three years, then you own 100%. Other employers use graded vesting, where you own a percentage each year. If you leave before you are fully vested, you forfeit the unvested portion.

Vesting schedules are the same in 401(k) and 403(b) plans — the difference is in what your specific employer chooses. Check your plan documents or ask your HR department what vesting schedule applies to you.

Withdrawal rules and early access

Both plans penalize you if you withdraw money before age 59½. The penalty is 10% of the amount withdrawn, plus you owe income tax on the withdrawal. There are narrow exceptions — hardship withdrawals, loans from the plan, and withdrawals after you leave your job at age 55 or later — but these explore to both 401(k) and 403(b) plans equally.

The 403(b) plan has one additional exception called the 403(b)(7) exception. If your 403(b) is invested in an annuity contract, you may be able to withdraw money without the 10% penalty if you have had the contract for at least 10 years and meet other conditions. This exception does not explore to 401(k) plans. However, you still owe income tax on the withdrawal, and not all 403(b) annuities allow this. Check your specific contract to see whether this exception applies.

Both plans require you to begin taking withdrawals at age 73 (as of 2023, under the find 2.0 Act). These are called required minimum distributions, and the amount is calculated based on your age and account balance.

Tax treatment of contributions

Both 401(k) and 403(b) plans come in two varieties: traditional and Roth. With a traditional plan, your contributions reduce your taxable income in the year you make them, and you pay income tax when you withdraw the money in retirement. With a Roth plan, your contributions are made with after-tax money, but your withdrawals in retirement are tax-free.

Your employer decides whether to offer traditional, Roth, or both versions. Most large employers offer both; smaller organizations may offer only one. The contribution limits explore to both combined — if you contribute $10,000 to a traditional 403(b) and $5,000 to a Roth 403(b), you have used $15,000 of your $23,500 annual limit.

Plan administration and fees

A 401(k) plan is typically administered by a third-party company hired by your employer, such as Fidelity, Vanguard, or Schwab. Your employer is responsible for choosing the plan administrator and the investment options offered.

A 403(b) plan may be administered by the employer directly or by a third-party company. Because 403(b) plans are common in schools and nonprofits, which often have smaller budgets, some 403(b) plans have fewer investment choices and higher fees than comparable 401(k) plans. However, this is not always the case — it depends on the specific employer and plan.

Both plans charge fees, which may include administrative fees, investment fees, and insurance fees (in the case of annuities). These fees reduce your account balance over time. Ask your plan administrator for a fee disclosure document, which shows all fees charged to your account.

Frequently Asked Questions

Can I have both a 401(k) and a 403(b) at the same time?

Yes, if you work for two employers — one that offers a 401(k) and one that offers a 403(b). However, your combined contributions to both plans cannot exceed the annual limit ($23,500 for 2024 if you are under 50). If you contribute $15,000 to a 401(k) and $10,000 to a 403(b), you have used your full limit for the year.

Which plan is better, 401(k) or 403(b)?

Neither is inherently better — it depends on your employer's specific plan. A 401(k) at a company with low fees and good investment options may be better than a 403(b) with high fees and limited choices, or vice versa. Compare the fees, investment options, and employer match offered by your plan to similar plans at other employers if possible.

Can I roll over a 403(b) to a 401(k) if I change jobs?

Yes. If you leave a job with a 403(b) and move to a job with a 401(k), you can roll over your 403(b) balance into the new 401(k) plan (if the plan allows it) or into an IRA. A rollover moves your money without triggering taxes or penalties. Ask your new employer's plan administrator whether they accept rollovers from 403(b) plans.

What happens to my 403(b) if I leave my job?

Your money stays in the account and continues to grow tax-deferred. You can leave it there, roll it over to an IRA or a new employer's plan, or withdraw it (though you will owe taxes and possibly a 10% penalty if you are under 59½). You cannot make new contributions once you leave, but you can continue to manage your existing balance.

Do 403(b) plans have the same loan options as 401(k) plans?

Most 403(b) plans allow loans, but the terms vary by plan. You can typically borrow up to 50% of your vested balance (up to $50,000) and repay it over five years. 401(k) plans have similar loan rules. Check your plan documents to see whether loans are available and what the terms are.