403(b) vs 401(k) Retirement Accounts: How Are They Similar?

Susan Kelly

Jul 29, 2023

Are you trying to decide which retirement account type best suits your financial planning goals? Understanding the similarities between 403(b) and 401(k) plans can help you make an informed decision.

From their tax treatment to contribution limits, a closer look at these two commonly-used retirement accounts reveals similarities that may benefit those who save for retirement securely and navigably.

Learn more about how 403(b) and 401(k) plans compare.

401(k) and 403(b) Plans: An Overview

The 401(k) and 403(b) plans offer an employer-sponsored retirement savings vehicle allowing employees to make pre-tax contributions towards retirement. This means the money you contribute is not subject to income tax when it goes into your account, which can save you money in the long run.

Investment options are also similar for both plans—you can select from various funds, such as stocks, bonds, mutual funds, and ETFs. Within 403(b) plans, you may also be able to invest in annuities.

Both plans also allow employer-matching contributions on a certain percentage of your contribution amount. This means that the more money you put towards retirement savings now, the greater rewards you can reap.

401(k) Plan

A 401(k) is a type of retirement plan that allows employees to save money pre-tax. Contributions are made from each employee’s paycheck, and employers may also match part or all of their employees' contributions. The 401(k) plan funds can be invested into various mutual funds, stocks, bonds, or other investments, and the earnings grow tax-deferred until withdrawn.

Funds can be withdrawn at retirement age, and some employers also allow for early withdrawals or loans against 401(k) funds without penalty. 401(k) plans offer many advantages over traditional savings accounts, like higher returns on investment, no taxes due on contributions or earnings until withdrawal, and employer matching of contributions.

In addition, 401(k) plans provide automatic enrollment, allowing employees to easily sign up and start saving for retirement right away. Finally, with a 401(k), employee contributions are taken out of payroll pre-tax, so taxes due on those contributions are deferred until withdrawal.

For many people, the 401(k) plan is an excellent way to start saving for retirement. It provides a simple, automated way to save pre-tax funds that can be invested in various investments. With employer contributions and tax-deferred earnings, 401(k) plans can provide a great source of retirement income.

So if you’re looking for an easy way to prepare for your future, consider signing up for a 401(k) plan. It’s an easy, tax-advantaged way to save for retirement.

403(b) Plan

A 403(b) Plan is a retirement plan option for employees of tax-exempt organizations, public schools, and certain ministers. This retirement plan allows employees to set aside part of their salary pre-tax into an annuity contract or mutual fund account. The employer often matches contributions to a 403(b) plan, making it a great way to save for retirement.

Employees can access the funds in their 403(b) plan when they reach age 59 ½ or use them for medical expenses before that age. Any contributions made are tax-deferred, meaning taxes are not due until money is withdrawn from the account. Withdrawals before a certain age may incur a penalty of 10%, however.

403(b) plans have contribution limits, much like 401(k)s. In 2020, individuals can contribute up to $19,500 in salary deferral contributions annually. This number may be higher for those aged 50 and older. The employer’s match is not included in the contribution limit.

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

The legal distinctions between a 401(k) and 403(b) plan are significant and should be understood before deciding which type of retirement savings plan is right for you. The primary difference between the two plans is who can offer them.

401(k) plans are available only to employees in the private sector, while 403(b) plans are available to employees of 501(c)(3) organizations, public schools, churches, and other tax-exempt entities. The rules governing these two types of retirement accounts also differ slightly.

Under the modern 401(k), employers can offer Roth versions in addition to traditional 401(k)s, which allow you to contribute pre-tax income. A 403(b) plan can only offer traditional retirement accounts; no Roth version is available.

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

Not all employer-sponsored retirement plans are the same. When an employer offers a 401(k) or 403(b) plan, there are differences in how those plans are managed and administered. For example, for-profit businesses typically sponsor 401(k) plans, while non-profit organizations like schools and churches primarily sponsor 403(b) plans.

Another difference between 401(k) and 403(b) plans is the maximum allowable contribution limits. For 2018, employees can contribute up to $18,500 per year into a 401(k), while 403(b) participants can contribute up to $19,000 annually (with additional catch-up contributions available for those aged 50 or over).

The rules governing 401(k) and 403(b) plans may also differ. For instance, 401(k) plans are required to offer a certain level of vesting for employer contributions, while 403(b) plans do not have this requirement. Additionally, many employers require employees to sign up for their 401(k) plan within 30 days of hire, while 403(b) plans usually do not have this requirement.


What Are the Contribution Limits for 401(k) and 403(b) Plans?

401(k) and 403(b) plans are subject to annual contribution limits set by the IRS. In 2021, individuals may contribute up to $19,500 per year to either a 401(k) or 403(b), plus an additional “catch-up” provision of $6,500 for those over 50. Employers can also make contributions on behalf of the employee, up to a combined total contribution limit of $58,000 (or $64,500, including catch-up contributions).

Can I Contribute to a 401(k) and 403(b) Plan?

You can contribute simultaneously to a 401(k) and a 403(b) plan. However, remember that your total annual contributions to both plans must be within the IRS limits for 2021 (as outlined above).

How Do Catch-Up Contributions Work With a 401(k) vs. 403(b) Plan?

Catch-up contributions are available to individuals aged 50 and over. For 2021, catch-up contributions for 401(k)s and 403(b)s are capped at $6,500 annually. Catch-up contributions can be made in addition to the annual contribution limits outlined above, allowing those over 50 to increase their retirement savings.


Retirement planning is always a challenge, and it’s essential to understand the different options available. 401(k) plans and 403(b) plans are two of the most popular retirement accounts, and while there are some legal differences between them, their practical implications are largely the same. Therefore, it's important to understand their similarities rather than focusing too much on the differences to make the best decision for your retirement needs. Ask yourself what type of employer plan you qualify for, how contributions would fit into an overall retirement plan, and what investment choices are available - this will help you get organized for a successful future.

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