The core difference: who your employer is

A 403(b) and a 401(k) are both retirement savings plans that let you set aside money before taxes are taken out of your paycheck. The main difference is who can offer them. A 401(k) is offered by for-profit companies — banks, tech firms, manufacturers, retailers. A 403(b) is offered by nonprofits, public schools, colleges, hospitals, and some government agencies. If your employer is a nonprofit or a public school, you get a 403(b). If your employer is a regular business, you get a 401(k).

Both plans work the same basic way: you choose how much to contribute each paycheck, the money goes into an account in your name, and you do not pay income tax on that money until you withdraw it in retirement. Your employer may also match part of what you contribute — usually a percentage of your salary. The money grows tax-free while it sits in the account.

Key Takeaways

  • A 403(b) is for nonprofit and public school employees; a 401(k) is for for-profit company employees.
  • Both plans let you contribute the same annual amount — $23,500 in 2024, or $31,000 if you are 50 or older.
  • A 403(b) may have fewer investment options and sometimes higher fees than a 401(k), depending on your plan.
  • If your nonprofit employer offers a 403(b), you cannot also have a 401(k) with that same employer, but you can have both with different employers.
  • Withdrawals before age 59½ usually trigger a 10 percent penalty in both plans, with limited exceptions.

Contribution limits are the same, but catch-up rules differ slightly

For 2024, you can contribute up to $23,500 per year to either a 403(b) or a 401(k). If you are 50 or older, you can add an extra $7,500 catch-up contribution, bringing your total to $31,000. These limits are set by the IRS and explore to both plan types equally.

However, 403(b) plans have an additional catch-up option that 401(k)s do not. If you have worked at the same nonprofit or school for 15 years or more, you may be able to contribute an extra $3,500 per year (up to a lifetime limit of $15,000). This is called the 15-year service catch-up, and it exists because nonprofit employees historically had fewer retirement savings options. You cannot use this catch-up unless your plan document specifically allows it, so check with your plan administrator to see if yours does.

Investment choices and fees often differ

A 401(k) typically offers a wider range of investment options. Most 401(k) plans let you choose from dozens of mutual funds, target-date funds, and sometimes individual stocks or bonds. Your employer's plan administrator selects which investments to offer, and they are usually required to offer a reasonable variety.

A 403(b) traditionally offered fewer choices — often just annuities (insurance products that may provide a certain payout) or a small set of mutual funds. This is changing, and many 403(b) plans now offer more options, but you may still see fewer choices than in a 401(k). Additionally, 403(b) plans sometimes carry higher fees because annuities can include insurance costs built into the product. Before you invest, ask your plan administrator for a fee schedule and a list of all available investments.

Employer matching works the same way in both plans

If your employer offers a match, it works identically in a 403(b) and a 401(k). A typical match is 50 percent of what you contribute, up to 6 percent of your salary. So if you earn $50,000 and contribute 6 percent ($3,000), your employer adds $1,500. Some employers match dollar-for-dollar up to a certain percentage; others use different formulas. Your employer decides the match amount, and it is spelled out in your plan documents.

The key point: you must contribute your own money first to receive the match. If you do not contribute, your employer does not match. And if you leave the job before the match vests (becomes yours to keep), you may forfeit some or all of it. Vesting schedules vary — some employers vest when ready, others over three to six years. Check your plan documents to see when your match becomes yours.

Withdrawal rules and penalties are nearly identical

In both a 403(b) and a 401(k), you can withdraw your money without penalty once you reach age 59½. If you withdraw before that age, you owe a 10 percent early withdrawal penalty plus income tax on the amount withdrawn. A few exceptions exist: you can withdraw penalty-free if you become disabled, if you are withdrawing to pay medical expenses that exceed 7.5 percent of your adjusted gross income, or in some cases if you are no longer employed by that employer.

Both plans also require you to start taking withdrawals at age 73 (as of 2023, under the find 2.0 Act). These are called required minimum distributions, or RMDs. The IRS calculates how much you must withdraw each year based on your age and account balance. If you do not take the full amount, you owe a 25 percent penalty on the shortfall (reduced to 10 percent if you correct it within two years).

Loans are available in both plans, with similar terms

Both 403(b) and 401(k) plans allow you to borrow from your own account. You can typically borrow up to 50 percent of your vested balance, with a maximum of $50,000. You repay the loan to yourself with interest — the interest rate is usually the prime rate plus 1 percent, set by your plan administrator. The loan must be repaid within five years, unless you are using the money to buy a primary residence (in which case you may have longer).

If you leave your job before the loan is repaid, you usually have 60 to 90 days to repay the full balance. If you do not, the outstanding balance is treated as a withdrawal, which means you owe income tax and possibly the 10 percent early withdrawal penalty. Borrowing from your retirement account reduces the money available to grow for retirement, so most financial advisors suggest it only as a last resort.

Portability and rollovers work the same way

When you leave a job, you can roll over the balance in your 403(b) or 401(k) into an Individual Retirement Account (IRA) or into a new employer's plan. A rollover means you move the money without cashing it out, so you avoid taxes and penalties. You have 60 days to complete the rollover, though most financial institutions can do it in a few days.

If you cash out instead of rolling over, you owe income tax on the full amount plus the 10 percent early withdrawal penalty (if you are under 59½). Your former employer is also required to withhold 20 percent for federal taxes, which you may not get back if your total tax liability is lower. Rolling over is almost always the better choice financially.

Frequently Asked Questions

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

Yes, but only with different employers. If you work for a nonprofit and contribute to a 403(b), and you also have a side job at a for-profit company with a 401(k), you can contribute to both. However, your combined contributions across all plans cannot exceed the annual limit ($23,500 in 2024). You cannot have both a 403(b) and a 401(k) with the same employer.

Which plan is better for retirement savings?

Neither is inherently better — it depends on your plan's specific features. A 401(k) often offers more investment choices and lower fees, but a 403(b) may offer the 15-year service catch-up if you have been at your nonprofit employer for a long time. Compare your plan's fee schedule, investment options, and employer match to decide which is working harder for your retirement.

What happens to my 403(b) or 401(k) if I get fired?

The money in your account is yours — your employer cannot take it. You can leave it in the plan, roll it over to an IRA, or roll it into a new employer's plan. If you have an outstanding loan, you typically have 60 to 90 days to repay it or face taxes and penalties on the unpaid balance.

Do I have to contribute to my employer's 403(b) or 401(k)?

No, contributing is optional. However, if your employer offers a match and you do not contribute, you are leaving information programs on the table. Even a small contribution — enough to capture the full match — can significantly boost your retirement savings over time.

Can I withdraw from my 403(b) or 401(k) while still employed?

Generally, no — not without penalty. Some plans offer a hardship withdrawal for specific situations like medical bills or preventing eviction, but these are rare and come with penalties and taxes. Loans are usually the better option if you need cash while still working. Check your plan documents or ask your plan administrator what options are available.