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401k vs 403b

401(k) vs 403(b): Which One Is Right For You In 2023?


While there are many options for saving for retirement, one that you may not have heard of is a 403(b). It’s commonly referred to as the cousin to a 401(k). Both 401(k) and 403(b) are employer-sponsored retirement plans that allow you to contribute pretax dollars to your retirement savings. So what’s the difference? Let’s discuss 401(k) vs 403(b) below. 

What is a 401(k) plan?

A 401(k) plan is an employer-sponsored retirement savings plan where employees can make tax-deferred contributions from their salary. Employers can offer a 401(k) as part of their benefits package and may match a portion of the employee’s contribution. By contributing to a 401(k) plan, individuals can reduce their taxable income.

What is a 403(b) plan?

A 403(b) plan is a retirement savings plan for employees of nonprofits, public schools, tax-exempt organizations, and certain ministers. It is also another name for a tax-sheltered annuity plan. An employee may contribute a portion of his or her salary into a tax-advantaged account, and an employer may match a percentage of that contribution. You can invest in either annuities or mutual funds.

What are the similarities between 401(k) and 403(b) plans?

  • Tax-advantaged accounts
    Both 401(k) and 403(b) plans are typically tax deferred. You can contribute your pretax dollars which can decrease your taxable income and therefore may decrease your tax bill. Your money will grow tax-deferred until you are ready to withdraw it. When you withdraw the money then you will pay ordinary income taxes on the withdrawals.

  • Withdrawal rules
    Both 401(k) plans and 403(b) plans allow participants to begin withdrawing regularly from their plan accounts after 59 ½. If you do withdraw early then you may need to pay a 10% penalty, as well as state and federal income taxes.
  • Required minimum distribution
    You must begin to withdraw from these accounts at age 72. The required minimum distribution (RMD) age for both 401(k) and 403(b) plans is 72.
  • Contribution limits
    Both 401(k) and 403(b) plans have the same annual contribution limits. The
    2023 contribution amount for 401(k)s and 403(b)s is $22,500, or $30,000 if you are aged 50 or older. Your contribution amount cannot exceed your total income.


How are 401(k) and 403(b) plans different?

While these plans are quite similar, there are some differences that you need to be aware of.

  • The type of employer
    The main difference is the type of employer that offers them. 401(k)s are offered by for-profit public sector companies.
    403(b)s are offered by nonprofits, churches and certain government agencies such as public schools and universities. If you’re the business owner and the only employee, you can set up a solo 401(k) for yourself and your spouse. There are no solo options for 403(b) plans.
  • Investment choice
    401(k)s are generally a mix of mutual funds, stocks, bonds, and other securities. Your company may also offer company stock. Assets in a 403(b) are generally annuities and
    mutual funds.
  • Catch-Up contribution limits
    401(k) and 403(b) plans both have an annual catch-up contribution limit of $7,500 if you are aged 50 and older. However, some 403(b) plans allow an additional contribution of $3,000 per year if an employee has worked for that organization for at least 15 years.  This option is not available with a 401(k).
  • Higher fees
    403(b)s generally charge higher fees than 401(k)s. Costs do vary from plan to plan so make sure you look to see what fees they charge.
  • Employer match
    While both plans do allow for employer matching, fewer employers offer matches with their 403(b). The reason for this is that when they do offer 403(b) matching, they must comply with ERISA.
  • ERISA compliance
    403(b) plans do not have to comply with the Employee Retirement Income Security Act (ERISA). However, if employers do offer a contribution match, they lose the ERISA exemption.

Comparison of 401(k) vs 403(b)

What is it?An employer-sponsored retirement savings plan for non-profit entitiesAn employer-sponsored retirement savings plan for any business entity, including non-profits.
Eligible employerEducational organizations and nonprofit organizations under 501(c)(3) of the IRCAny employer
Investment optionsAnnuities and mutual fundsAny investment available under the plan
Tax TreatmentContributions are made pre-tax and grow tax-deferredContributions are made pre-tax and grow tax-deferred
Contribution Limits 2023Employees can contribute up to $22,500 for 2023 (or $30,000 if aged 50 and older). An employee of a “qualified organization” with 15 years of service may be eligible to contribute an additional $3,000 per year.Employees can contribute up to $22,500 for 2023 (or $30,000 if aged 50 and older).
Deductions and deferralsEmployer contributions are tax deferred for employees. Employee contributions can be pre-tax or tax deferred.Employer contributions deductible to the employer. Tax deferred for employees. Employee contributions can be pre-tax and tax deferred.
Subject to ERISAYes if considered an “employee benefit plan.” Employers often don’t provide employer contributions to the plan to remain exempt from ERISA.Yes
Form 5500 annual reportingIf a non-ERISA plan, then a form 5500 is not required. If ERISA plan, then a form 5500 is required.Required

How do catch-up contributions work with a 401(k) vs 403(b) Plan?

401(k) or 403(b) plan participants age 50 and older can make additional catch-up contributions of $7,500 in 2023.

A 403(b) plan also allows employees who have worked for the same employer for at least 15 years to make an additional contribution equal to the lesser of:
– $3,000,
– $15,000, reduced by the amount of additional elective deferrals made in prior years because of this rule, or
– $5,000 times the number of the employee’s years of service for the organization, minus the total elective deferrals made for earlier years.

Is a 403(b) better than a 401(k)?

Both are solid retirement savings vehicles that offer tax advantages and investment options. One is not necessarily better than the other. The type of retirement plan that you are eligible for is dependent on your employer, so you don’t generally get to choose between a 403(b) or a 401(k). 

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

While it is rare for employers to offer both a 403(b) and a 401(k), it is possible. If this is the case, then you can contribute to both. However, you would still be subject to the $22,500 contribution limit combined between the two accounts.

Should I choose a 403(b) or a 401(k)?

It’s not up to you to decide whether you should choose a 403(b) or 401(k). Unless you are a business owner, the employer will determine what plan they will offer you. You will most likely have access to a 401(k) if you work for a for-profit business. However, if you work for a school, religious organization, government, or hospital then you will probably have access to  a 403(b). 

Can I move funds from a 403(b) to a 401(k)?

In some circumstances it is possible to move funds from a 403(b) to a 401(k) plan. This process is called a rollover.

If you are no longer employed by the organization that sponsors your 403(b) then you can typically roll the funds to a 401(k) as long as the new 401(k) plan accepts rollovers. This is a great option if you want to consolidate your accounts.

If you are still employed by the organization that sponsors your 403(b) plan then you may not be able to complete a rollover until you leave that employer.

It’s best to consult your financial advisor before making any changes to your retirement savings accounts.

Start saving for retirement today!

401(k) and 403(b) plans are similar and the decision will typically come down to what is offered by your company.  The important thing is to take advantage of your employer’s retirement plan and start saving for retirement today. It’s a simple, effortless way to save for retirement. If you want help with your finances and are interested in having a comprehensive financial plan for your family, feel free to schedule a discovery call with one of our financial advisors today!

Best Financial Planner Washington DC

Alvin Carlos, CFP®, CFA is an investment advisor and fee-only financial planner, in Washington, D.C that works with clients across the country. He has a Master’s degree in International Relations from SAIS-Johns Hopkins. Alvin is a partner of District Capital, a financial planning firm designed to help professionals in their 30s and 40s achieve their financial goals through smart investing, reducing taxes, retirement planning, and maximizing their money. Schedule a free discovery call to learn how we can help elevate your finances.


District Capital is an independent, fee-only financial planning firm. We help professionals and entrepreneurs in their 30s and 40s elevate their finances and maximize their money. We are based in Washington, D.C and we work with people virtually nationwide.

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