Differences between 401(k) vs. 403(b): Which nest egg’s best?

Employer-provided plans are the bread and butter of most Americans’ retirement strategy. They’re pretty widely available, easy to enroll in, and a substantial way to invest in your future. 

If you’re here, you likely have an employer-provided 401(k) or 403(b) option available. In fact, 48% of private workers are enrolled in a defined contribution plan like these. 

So, you want to learn the differences between a 401(k) and 403(b) to understand which you should invest in. 

The main difference is eligibility — a 401(k) is provided by a for-profit employer, while 403(b)s are offered by tax-exempt employers. But that’s not all. 

If you want the full breakdown, you came to the right place. Our mission is to help more Americans reach financial freedom with a roadmap that maximizes their investments while minimizing tax liability. 

And understanding the difference between these two tax-advantaged accounts is a great first step. 

401(k) vs. 403(b) plans — eligibility is key

Both of these are tax-advantaged accounts to help employees save for retirement. 401(k)s and 403(b)s are employer-provided, unlike IRAs. 

However, you don’t get to choose between a 401(k) and 403(b) — at least not if you’re already employed. Your employer’s tax status determines what plans they’re eligible to offer. 

401(k)s are far more common than 403(b)s because they’re provided by your typical, for-profit, 9-to-5 employer. Banks, retailers, trades, and service providers largely offer 401(k) plans for employee retirement planning. 

Only tax-exempt employers offer 403(b) plans. These are your churches, municipal services like libraries and public schools, and some hospitals. 

If you’re deciding between public and private school job offers, you have some choice. Otherwise, you’re stuck with what your employer has (like the rest of us). 

Luckily, there are several similarities between these two employer-sponsored retirement plans. These include:

• Employer matching contribution for each account. 
• Pre-tax contributions to a traditional account defer taxes until withdrawal. 
• After-tax contributions to a Roth account grow tax-free, so you don’t owe taxes on earnings (though Roth options are less common for 403(b)s). 

403(b) vs. 401(k) contribution limits and rules

Elective deferrals to employer-provided retirement plans, including both a 401(k) and 403(b), max out at $23,000 in 2024 — $30,500, including the $7,500 catch-up contribution for people 50 or older.

These are cumulative, so if you have a 403(b) with your employer and a solo 401(k) for your side hustle, you can’t contribute more than $23,000 in employee contributions across accounts. Multiple accounts are allowed, but it doesn’t increase your annual limits. 

However, 403(b)s permit a bonus contribution once you reach 15 years of employment with the same company. You can contribute $3,000 a year as a bonus contribution once you pass the 15-year mark, for a maximum lifetime total of $15,000.

Employer-match contributions for rapid growth

In addition to high contribution limits, these employer-provided plans often include employer-match benefits. Employers can contribute to your account as part of your overall compensation and support your retirement strategy. 

Employer matches tied to your own contributions and salary. Your employer may match your contributions up to a certain percentage of your salary or match a percentage of your contributions up to a certain dollar amount. 

Examples include:

• 50% matching contributions up to 6% of your salary
• Full match contributions up to 4% of your salary
• 50% matching contributions up to $6,500

This is essentially free money that will compound over time for huge returns without taking from your wallet. 

However, employer matches aren’t always fully vested from the beginning. 

You might have to work for a company for a year or so before you get ownership of employer contributions to your account. Chat with your plan administrator or manager to understand the full scope of employer contributions. 

Tax-deferred and tax-free advantages

Tax advantages are similar between these accounts and ultimately boil down to the specific account type you choose — traditional or Roth. 

Both 401(k)s and 403(b)s often offer traditional and Roth options, but your specific provider might only offer traditional accounts. 403(b)s are less likely to offer Roth options. 

The main difference between traditional and Roth is whether your contributions are pre-tax or after-tax. 

Pre-tax contributions go to a traditional tax-advantaged account. This defers taxes until withdrawal, reducing your current taxable income and potentially reducing your total tax liabilities. 

After-tax Roth contributions pay the government upfront. Your income is taxed as usual, and then your contributions are invested, earning tax-free returns. This has huge potential for wealth building since you won’t owe any taxes on your total earnings. 

These are also sometimes called tax-deferred vs. tax-exempt accounts. 

How are they different?

The main features of 401(k)s vs. 403(b)s  are extremely similar, but there are a few important perks each offers individually. 

Account access varies with your employer

Ultimately, your ability to access these accounts depends on your employer and their tax status. 

A 401(k) is more common than a 403(b), but both are pretty widely available. 

If you work a corporate role at a for-profit company like a retailer or other service provider, your employer likely offers a 401(k) to full-time employees. Though, small businesses can also opt for something like a SEP IRA. 

A 403(b) plan is basically a 401(k) for tax-exempt organizations like nonprofits, government employers, and public services.

401(k) investment options are best

Plan participants can invest their funds however they like in either account, but your investment options are limited based on the account and plan provider. A 401(k) is best if you want plenty of options, but a 403(b) is still valuable. 

The difference is that 401(k)s often allow investors to choose among mutual funds, exchange-traded funds (ETFs), individual stocks, and bonds. That’s a lot of options for a diverse portfolio that you can easily adjust to meet your desired allocation mix. 

Federal law limits 403(b) investment options to annuities and mutual funds. These are valuable investments that still offer plenty of customization, but the choices aren’t nearly as diverse as 401(k) plans. 

Enjoy extra catch-up contributions to a 403(b)

Both accounts offer catch-up contributions once you’re 50 years or older. This bonus of $7,500 each year can really drive your account growth and help close the gap in the countdown to retirement. 

If you have the funds and really want to max out your contributions, 403(b)s have a bonus contribution for folks who have worked with the same employer for 15+ years. 

This has a max lifetime limit of $15,000, with annual contribution limits of $3,000. While not as substantial as an extra $7,500 each year, the addition is certainly appreciated come retirement. 

Which plan is best? 403(b) vs. 401(k)

You can’t go wrong with either of these accounts — both have generous annual contribution limits to help you reach your retirement goals. But still, one might be better for you, personally. 

The key considerations are:

• Eligibility: does your job offer a 401(k) or 403(b)?
• Investments: do you want a wide selection of investment options, or are annuities and mutual funds good for you?
• Contributions: if you can max your contributions, 403(b)s offer the ability to make bonus contributions of $3,000 per year, up to $15,000 total,  once you reach 15 years of employment with the same organization. 
• Employer match: both accounts can offer employer match contributions, but it’s much more common with 401(k)s. 

Ultimately, eligibility will make or break your enrollment choice. But it’s good to know what’s available while job hunting. 

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

If you have multiple jobs, one at a for-profit company and one at a tax-exempt organization, or a side hustle that qualifies for a solo 401(k), you might be able to have both accounts. It’s totally legal to enroll in both, but it’s unlikely that you qualify based on your employment. 

Annual contribution limits aren’t increased by having multiple accounts. You can still only contribute $23,000 a year across employer-provided accounts. However, you can still benefit from the 403(b) bonus contribution if you’ve been with your employer for 15 years. 

The Playbook take: Choose the tax-advantaged account available to you

Making the most of high contribution limits early in your career provides the account decades to benefit from compound growth. That’s what makes tax-advantaged accounts like 401(k)s and 403(b)s so great. 

Both provide high contribution limits, tax-deferred and tax-exempt account options, and the ability to direct your own investments. But 401(k)s have more investment options and employer match potential, while 403(b)s offer extra contributions. 

At the end of the day, the account provided by your employer is your best option. If you want to invest more for retirement and explore independent account options, Playbook can help you create a retirement roadmap to prioritize your contributions and maximize tax advantages.