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

What pops into your head when you hear 403(b) or 401(k)? No, they’re not droids from the latest Star Wars movie. They’re tools to help you build a solid financial future! But the first rule of investing is, “Never invest in anything you don’t understand.” So, before you invest your hard-earned money in either one of these plans, you need to fully understand how they work.

The main difference between a 403(b) and 401(k) is the type of employer who offers them. 401(k) plans are offered by private, for-profit companies. 403(b) plans, on the other hand, are offered by tax-exempt and nonprofit organizations. We’ll unpack some other differences in a minute, but that’s the gist of it. Besides that, the plans are actually very similar. Let’s dive in.

What Are 401(k) and 403(b) Plans?

401(k) and 403(b) plans have a lot in common. They’re both tax-advantaged, employer-sponsored retirement plans—meaning you can get one or the other at most full-time jobs as part of your employer’s benefits package. And you can use either one to chase your wildest retirement dreams!

But here’s the thing: Don’t get too caught up in the names. Think of these plans as an egg carton, and your investments are the eggs. The 401(k) or 403(b) itself doesn’t make you money—it's just a container. Your money grows through the investments within the retirement plan—the eggs inside the container.

The names of the accounts just come from their section of the IRS code—literally sections 401(k) and 403(b). That’s what happens when math nerds are in charge of naming things!

For both, we recommend you invest in growth stock mutual funds. Make regular contributions and let your money hang out with its two best friends: time and compound growth. You’ll be amazed by how your money grows over the long haul. Try our compound interest calculator that’ll do the calculations for you!

Quick note: There are two types of 401(k)s and 403(b)s—traditional and Roth. We’re going to focus on traditional here because they’re more common. But we always recommend going with Roth if you have the option.

Now, let’s take a look at each plan.

401(k) Plans

A 401(k) is a retirement savings plan that allows you to contribute part of your paycheck before you pay taxes on it, which lowers your taxable income for the year. Congrats—you get a tax break! But when you start to withdraw money from your 401(k) (at age 59 1/2), that income will be taxed. That’s why the 401(k) is called a tax-deferred account.

The 401(k) was passed into law in 1978. A guy named Ted Benna, a benefits consultant for large companies, studied the tax code and created the concept of a 401(k) program.¹ Now, over 40 years later, Americans have invested around $7.3 trillion in 401(k) plans!²

There are lots of details about 401(k) plans, but we’ll save you some time and summarize the main features: 

• Employer match: Most employers who offer a 401(k) will also offer a match—that’s code for free money! They will match what you contribute up to a certain percentage of your salary—usually 3% or 4%.
   
• Contribution limits: In 2024, you can contribute up to $23,000 of your own money in your 401(k) (you can contribute an additional $7,500 if you’re age 50 or older). The combined contribution of your money and your employer’s match cannot exceed $69,000 per year (or $76,500 if you’re age 50 or older).³
   
• Early withdrawal penalties: Listen, saving for retirement is a marathon, not a sprint. You need to think long term about your 401(k). Even though there are such things as 401(k) loans and early withdrawals, don’t even think about taking the money out until you’re at least 59 1/2. If you do take money out of your 401(k) early, you’ll be hit with big penalties and state and federal income tax.
   
• Required minimum distributions: The IRS requires you to start withdrawing a certain amount from your 401(k) beginning at age 73. These are called RMDs—required minimum distributions.⁴

Now, let’s talk about the 403(b).

403(b) Plans

If you missed the section about 401(k) plans, go back and read it. Because guess what? 403(b) plans and 401(k) plans are almost identical, but 403(b) plans are only available for employees of tax-exempt organizations. That means if you work for a hospital, school, university, church or nonprofit, chances are you have access to a 403(b) account. For all practical purposes, though, it functions just like a 401(k)—including the potential for an employer match.

There are a few other differences between the 401(k) and the 403(b). Let us explain.

Differences Between 401(k) and 403(b) Plans

401(k) and 403(b) plans have a lot in common, but here’s what sets them apart:

• Eligibility: 401(k) plans are offered by for-profit companies, and 403(b) plans are offered by tax-exempt organizations, such as hospitals, schools, universities, nonprofits and religious organizations.
   
• Investment options: 403(b) plans only offer mutual funds and annuities, but 401(k) plans offer mutual funds, annuities, stocks and bonds. Because 401(k) plans are more expensive for the company, they usually offer a wider range and sometimes better quality of investment options.
   
• Employer match: Both plans allow for employer matching, but fewer employers offer matches with their 403(b) plans. If an employer who offers a 403(b) does offer a match, they have to comply with regulations created by ERISA—the Employee Retirement Income Security Act—which was passed in 1974.⁵ Most employers want to avoid these regulations because they cost time and money.
   
• Cost: 403(b) plans have lower administrative costs because the government doesn’t want to overburden nonprofit organizations. 401(k) plans are more expensive for employers. But don’t worry—this doesn’t really affect you as the employee.
   
• Additional contributions: Some 403(b) plans allow people who have worked at least 15 years with the same organization to contribute an additional $3,000 to their plan per year up to a $15,000 lifetime limit.⁶

Differences Between 401(k) and 403(b) Retirement Plans

401(k) vs. 403(b): Which Plan Should I Choose?

Well, honestly, unless you’re a business owner, you actually don’t have any choice in the matter! Your employer determines which plan they offer you. If you work for a for-profit business, you’ll most likely have access to a 401(k) as part of your benefits package. But if you work for a school, religious organization, government organization, or hospital, chances are you’ll have access to a 403(b).

Market chaos, inflation, your future—work with a pro to navigate this stuff.

Okay, that’s all fine and dandy, but what if you’re choosing between two jobs? One at a for-profit company and one at a nonprofit company. Or if you’re thinking about leaving one job for another? If the salary and job duties are similar, retirement benefits might be a tiebreaker. Here are two big questions to consider:

Does the employer offer a match?

This is a big one. After all, it’s free money! Like we said earlier, many more 401(k) plans offer employer matching than 403(b) plans due to regulation requirements. If one job offers a match—or a better match—while the other doesn’t, that might sway your decision.

Does the employer offer a Roth option?

We’re big fans of the Roth 401(k) and Roth 403(b). In fact, we’d take a Roth retirement plan over a traditional plan every time. Why’s that? Well, with a Roth, your money is invested after taxes are taken out. So once you reach retirement age, you can withdraw your savings tax-free! 

Once you’re ready to start investing (you’re debt-free and have a fully funded emergency fund) make the most of either your 403(b) or your 401(k) and a Roth IRA by investing 15% of your gross income for retirement. 

Start Preparing for Retirement Today

Our team conducted the largest research study ever done on millionaires. Do you know what their number one wealth-building tool is? Their 401(k) or 403(b). Nearly 8 out of 10 millionaires built their wealth primarily through their workplace retirement plan.⁷ 

The bottom line is both the 401(k) and 403(b) are great retirement plans. If you’re thinking about investing in either one, you’re in good company. You’re thinking like a millionaire! But we’ve got some news for you: There’s no magic age when a retirement fairy comes to take care of you. It’s up to you to make a plan for your financial future, no matter which account you use. Use our Investment Calculator to discover how much you can expect to have in retirement.

Not sure which mutual funds are best for your 401(k) or 403(b)? Simplify things by getting professional investing advice. If you need help looking for a qualified investment pro, be sure to try our SmartVestor program. It’s a free way to get connected with financial advisors near you.

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This article provides general guidelines about investing topics. Your situation may be unique. To discuss a plan for your situation, connect with a SmartVestor Pro. Ramsey Solutions is a paid, non-client promoter of participating Pros.