A Comparative Look at 403(b) and 401(k) Plans

Retirement Financial Planning Concept.
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If you’ve had more than one employer, chances are you’ve had more than one retirement plan. You may have also had more than one type of plan. The 401(k) plan is probably the most common, but there is also the 403(b) plan which is quite similar but with a few differences.

Read: 3 Ways to Recession Proof Your Retirement

Here’s what you need to know about the similarities and differences between a 401(k) and a 403(b).

What Is a 401(k) Plan?

A 401(k) plan is a company-sponsored retirement savings plan. Employees can have money withheld from their paychecks before they pay taxes on it and deposited into an investment account. The employee can choose the investments they want from the options that are available for that particular plan. In most cases, the employer will match part of the employee’s contribution with additional funds.

What Is a 403(b) Plan?

A 403(b) Plan is also an employer-sponsored retirement plan but is most often used by non-profit organizations. It operates similarly to a 401(k).

How Are a 401(k) and 403(b) Similar?

A 401(k) plan and a 403(b) plan are more alike than they are different. Here are some of the primary similarities.

Deferral Limits

Both plans have an annual elective salary deferral of $22,500 in 2023. This is the maximum amount employees can have withheld from the pay to be contributed to the account. Note that this is the total amount you can contribute to all your retirement plans during the year, so if you have more than one job — with more than one plan — or you change jobs during the year, you still cannot defer more than $22,500. The only exception to this is catch up contributions which are described below.

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Employer Matching

With both types of plans, the employer can match some of the employee’s contributions. The amount and conditions of the match are up to the employer, but they will usually match up to a certain percentage of salary, at either $0.50 to the dollar or dollar for dollar.

Here are a couple of examples.

Jane has a 401(k) plan from her employer, ABC Company. Jane earns $100,000 per year and contributes 10%, or $10,000 to her 401(k) plan. ABC Company matches her contributions in this way: the first 3% of her salary is matched dollar for dollar, and the next 3% is matched at 50 cents per dollar. So, ABC Company contributes $4,500 to Jane’s 401(k) plan account — $3,000 for the first 3% Jane defers and $1,500 for the next 3%.

Joe has a 403(b) plan from his employer, XYZ Foundation. Joe also earns $100,000 and contributes 10% to his plan. His employer matches the first 5% of his salary at $0.50 on the dollar. So XYZ Foundation contributes $2,500 to Joe’s 403(b) plan account.

Loan Provisions

Both types of plans have the ability to allow participants to take a loan against their account balance if they choose to do so. Note that this is dependent on the particular plan, so not all employers offer this option.

What Is the Difference Between a 401(k) and a 403(b)?

Both are tax-advantaged retirement savings plans that are sponsored by employers. The major difference is that 401(k)s are typically offered by for-profit corporations and other businesses, while 403(b)s are typically offered by non-profit organizations, such as public schools, hospitals, churches, health and welfare service agencies, etc.

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An employer may offer a 401(k) or a 403(b) plan, but not both. A particular employee may have both types of plans at some point in their career, depending on what is offered by a given employer.

Catch-Up Provisions

Both plans offer catch-up provisions, but they’re not exactly the same.

A 401(k) plan offers a catch-up provision for employees who are over age 50. If you are 50 or older by the end of 2023, you can defer an extra $7,500 in your 401(k) plan, for a total of $30,000. Your total deferral cannot exceed 100% of your compensation, and the total of your contributions and your employer’s contributions cannot exceed $66,000.

A 403(b) plan offers the same catch-up contribution for employees who are 50 or older by the end of the year, plus may offer catch ups for employees with 15 or more years of service. If you have at least 15 years of service with the same eligible employer, you can contribute the lesser of:

  • $3,000
  • $15,000 minus previous additional total elective deferrals
  • $5,000 times your years of service, minus total elective deferrals made in the past.

It gets even more complicated if you qualify for both catch-up provisions, so check with your plan administrator to see exactly what you can contribute.

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

Both plans are so similar that it’s hard to say if one is better than the other in every circumstance. Since each employer can only offer one or the other, the only time you would need to decide which is better would be if you were comparing job offers from organizations that offer different types of plans.

In this case, the best thing to do is to compare the specific plans to determine which is best. This will likely come down to the company match, since that can vary considerably between companies. If everything else is equal, choose the organization that has the most generous match.

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What To Do at Retirement Time

When it comes time to retire, either a 401(k) or a 403(b) — or both, if you have them both — can be rolled over into an IRA. It’s wise to do this with all retirement accounts you have so that you have all your assets in one place and don’t have to spend your retirement tracking different accounts. It also makes it easier when it’s time to start taking the required minimum distributions from your retirement account since all your retirement funds will be in a single account.

Whether your employer offers a 401(k), a 403(b), or a different kind of retirement plan, the best thing to do is to start to contribute as much as you can as early as you can. And be sure to contribute at least enough to get the full employer match – otherwise you’re leaving money on the table, and nobody wants that!


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