Key Takeaways
- 401(k)s are offered by for-profit employers; 403(b)s are offered by nonprofits, public schools, hospitals, and government agencies.
- Both plans let you contribute the same dollar amount per year, though 403(b)s have a catch-up rule that sometimes allows higher contributions for long-time employees.
- 401(k)s typically offer a wider range of investment choices, while 403(b)s historically offered mainly annuities but now often include mutual funds.
- If you leave your job, you can roll a 401(k) or 403(b) into an IRA or your new employer's plan to avoid taxes and penalties.
- Both plans charge a 10% penalty plus income tax if you withdraw money before age 59½, with limited exceptions.
Who Offers Each Plan and Why It Matters
Your employer type determines which plan you have. For-profit companies—banks, retailers, tech firms, manufacturers—offer 401(k)s. Nonprofits, public school districts, universities, hospitals, and government employers offer 403(b)s. This distinction exists because the tax code treats these employer types differently, so the retirement plans available to their workers differ too.
The employer type also affects what happens when you leave. If you work for a nonprofit and move to a for-profit company, you cannot roll your 403(b) directly into your new employer's 401(k)—you have to move it to an IRA first. Knowing which plan you have prevents confusion when you change jobs.
How Much You Can Contribute Each Year
For 2024, both plans allow you to contribute up to $23,500 of your own money per year (this amount changes annually). If you are 50 or older, both plans let you add an extra $7,500 catch-up contribution, bringing your total to $31,000. These limits explore whether you have a 401(k) or a 403(b).
However, 403(b)s have an additional rule that sometimes allows higher contributions. If you have worked for the same nonprofit, school, or government agency for 15 or more years, you may be able to contribute an extra $3,000 per year (up to a lifetime limit of $15,000). This rule exists because nonprofits and public employers often pay less than for-profit companies, so the tax code gives long-time employees a way to catch up on retirement savings.
Investment Options: What You Can Buy Inside the Plan
A 401(k) typically offers dozens of investment choices: mutual funds, index funds, target-date funds, and sometimes individual stocks or bonds. Your employer chooses which investments to include, so the menu varies by company. A large employer might offer 50 options; a small one might offer 10. You pick how to divide your contributions among these choices.
A 403(b) historically offered mainly annuities—insurance products that may provide a fixed payment in retirement. Today, most 403(b)s also offer mutual funds and other investments, but annuities remain common. Some 403(b) plans still offer only annuities, which means fewer choices than a typical 401(k). Before you start contributing, ask your employer what investment options are available in your specific plan.
Employer Matching and Vesting
Many employers add money to your 401(k) or 403(b) as a match—typically 3% to 6% of your salary if you contribute that much yourself. This is information programs, and the rules work the same way in both plans. If your employer offers a match, you should contribute at least enough to get the full match, because passing it up means leaving money on the table.
Both plans use vesting schedules, which determine when the employer's matching money becomes yours to keep. A common schedule is three years: you own 100% of your match after three years of employment. If you leave before you are fully vested, you forfeit the unvested portion. Check your plan documents or ask your HR department what vesting schedule applies to you.
Withdrawals Before Retirement and Penalties
If you withdraw money from either plan before age 59½, you owe income tax on the withdrawal plus a 10% penalty. This applies to both your contributions and any employer match. For example, if you withdraw $10,000 at age 45, you might owe $2,000 to $3,000 in taxes and penalties, depending on your tax bracket.
Both plans have narrow exceptions to this penalty. You can withdraw without penalty if you are permanently disabled, if you are facing a serious financial hardship (defined by the IRS), or if you leave your job in the year you turn 55 or later. A 403(b) also allows penalty-free withdrawals for certain medical expenses. These exceptions are strict and require documentation, so talk to your plan administrator before assuming you may have access to.
What Happens When You Leave Your Job
When you change employers, you have four options for your 401(k) or 403(b): leave it with your old employer, roll it into your new employer's plan, roll it into an IRA, or cash it out. Cashing it out triggers taxes and the 10% penalty (unless you meet an exception), so that is rarely the best choice.
A rollover to an IRA gives you the most investment choices and the lowest fees, because IRAs are not limited to the investment menu your employer chose. A rollover to your new employer's plan keeps everything in one place and may offer better loan options if your new plan allows them. Either way, do a direct rollover, where the money moves from one institution to another without passing through your hands—this avoids withholding taxes and keeps the entire balance growing tax-deferred.
Loans From Your Plan
Many 401(k)s allow you to borrow against your balance—typically up to 50% of what you have saved, with a maximum of $50,000. You repay the loan to yourself with interest, and the interest goes back into your account. If you leave your job before repaying the loan, you usually have to pay back the full balance within 60 days or face taxes and penalties on the unpaid amount.
403(b)s are less likely to offer loans, though some do. If your 403(b) does allow loans, the rules are similar to a 401(k). Before you borrow, understand that you are reducing the money that grows tax-deferred, which can hurt your retirement savings. Borrowing should be a last resort, not a regular source of cash.
Frequently Asked Questions
Can I have both a 401(k) and a 403(b) at the same time?
Yes, if you work for both a for-profit company and a nonprofit or school. However, your combined contributions to both plans cannot exceed the annual limit ($23,500 for 2024). If you contribute $15,000 to your 401(k), you can only contribute $8,500 to your 403(b) that year.
What if I move from a 403(b) job to a 401(k) job?
You can roll your 403(b) into your new employer's 401(k) if the plan accepts rollovers, or into an IRA. Do a direct rollover to avoid taxes. Some 401(k) plans do not accept 403(b) rollovers, so check with your new employer's HR department first.
Do 403(b)s have lower fees than 401(k)s?
Not necessarily. 403(b)s with annuities often have higher fees than 401(k)s with mutual funds, but modern 403(b)s with mutual fund options can have fees comparable to 401(k)s. Ask your plan administrator for a fee breakdown before you assume one is cheaper than the other.
What is the difference between a traditional and a Roth 403(b)?
A traditional 403(b) reduces your taxable income now, and you pay taxes when you withdraw in retirement. A Roth 403(b) uses after-tax money, but withdrawals in retirement are tax-free. Not all 403(b) plans offer a Roth option, so check with your employer.
Can I withdraw from my 403(b) if my nonprofit is struggling financially?
No. Your personal financial need does not override the plan rules. You can withdraw only if you meet the IRS exceptions: age 59½, disability, serious hardship, or separation from service at age 55 or later. Employer financial hardship is not an exception.