William Huston, AIF®, AIFA®

403b vs 401k: Which Works for Me?

403(b) and 401(k) plans are two common retirement savings tools available for employees in the US. While they overlap in many areas, these retirement plans have important distinctions.

William Huston, AIF®, AIFA®

William Huston, AIF®, AIFA®

The primary differentiator between a 401(k) and a 403(b) is the type of employer that can provide them. 401(k) plans are typically offered by for-profit companies, whereas 403(b) plans are the go-to choice for nonprofit organizations, schools, and specific government entities.

This highlights the differences between these two retirement accounts, and some key aspects to consider.

Key Takeaways
  • When deciding between a 403(b) and a 401(k) plan, it's essential to understand that your choice may be determined by your employer's offerings.
  • A 403(b) plan is often the preferred option for employees of tax-exempt organizations, schools, and specific government entities, while 401(k) plans are typically provided by private, for-profit companies.
  • Collaborating with experienced investment professionals like Ekenna Anya-Gafu, Wealth Management President at Bay Street Capital Holdings, can provide valuable insights into optimizing your retirement savings.

The contents of this article are for educational purposes only. They are not intended to be a source of professional financial advice. You will find experts on financial planning and financial management here. More on disclaimers here.

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401(k) Plans

401k contributions

A 401(k) retirement savings plan is a formal savings tool with employer matching contributions. A 401k plan allows employees to put a portion of their earnings into an individual account. This plan can take various forms, including profit-sharing, stock bonus, pre-ERISA money purchase pension or rural cooperative plans.

On average, 401k accounts see a yearly return of around 5% to 8%, allowing your savings to steadily grow over time. What's particularly beneficial is that your money stays tax-deferred until you withdraw it in retirement.

Advantages of a 401(k) Plan
  • Yearly Contributions: You can add funds annually.
  • Employer Contributions: Some employers match your contributions.
  • Easy Maintenance: These accounts are generally easy to manage.
  • Tax Savings: It reduces your taxable income.
Disadvantages of a 401(k) Plan
  • Saving Challenges: Saving enough might be tough for some.
  • Limited Employer Support: Employer contributions can be minimal.
  • Potential High Fees: Some plans have higher fees.

403(b) Plans

retirement savings

A 403(b) plan, often known as a tax-sheltered annuity plan or TSA, is a retirement plan primarily available to employees of public schools and select charitable organizations. It resembles a 401(k) plan maintained by for-profit entities. Just like its counterpart, a 403(b) allows employees to set aside a portion of their income in individual accounts.

The main distinction here is the kind of employers who offer these plans. While 401(k) plans are accessible through private, for-profit companies, 403(b) plans are exclusively available to nonprofit organizations and government employers.

Advantages of a 403(b) Plan:

403(b) plans offer several advantages, such as:

  • Tax-advantaged savings
  • Portability (you can take your retirement savings with you when changing jobs)
  • Employer contributions
  • Catch-up contributions
  • Tax-deferred investment earnings
  • Reduction of taxable income
  • Control over investment options (the right to allocate your retirement savings)
  • Potential for tax-free earnings upon withdrawal
  • Access to accounts with a distributable event
Disadvantages of a 403(b) Plan

Drawbacks of a 403b plan may include:

  • high fees
  • limited investment options
  • increased administrative costs
  • early withdrawal penalties (fees and taxes imposed if you take money out before a certain age), and
  • the plan is not always subject to ERISA regulations.

It's crucial to remember that a 403(b) plan primarily serves as a retirement savings vehicle. Early withdrawals may incur additional costs in the form of taxes and penalties, as funds distributed before age 59 1/2 may be subject to such consequences.

Features of a 403b vs 401k compared

person weighing savings options

403(b) and 401(k) plans are both retirement savings plans, but they are designed for different types of organizations and have some differences in terms of eligibility, contribution limits, and tax benefits. Here are some key differences between the two, as well as how they compare to tax-advantaged retirement plans:

Eligible Employers

403(b) Plan: These are typically offered by tax-exempt organizations such as public schools, hospitals, religious organizations and certain nonprofit entities. Governmental 457(b) plans are also similar to 403(b) plans.

401(k) Plan: These are typically offered by for-profit companies, although they can also be offered by some nonprofit organizations.

Contribution Limits

403(b) Plan: For 2024, the annual contribution limit for a 403(b) plan is $23,000 for individuals under the age of 50. If you are 50 or older, you can make contributions of up to an additional $7,000, for a total of $30,000.

401(k) Plan: As of 2023, the annual contribution limit for a 401(k) plan is $23,000 for individuals under the age of 50. If you are 50 or older, you can make contributions of up to an additional $7,000, for a total of $30,000. However, some 401(k) plans may allow higher contribution limits based on plan-specific rules.

Investment Options

403(b) Plan: These plans often have limited investment options, primarily consisting of annuities and mutual funds. However, some 403(b) plans may also offer access to 403(b)(7) custodial accounts that provide more investment flexibility.

401(k) Plan: These plans typically offer a wider range of investment options, including mutual funds, stocks, bonds, exchange-traded funds (ETFs) and sometimes company stock.


Vesting refers to the period of time an employee must work for an employer before they have full ownership of employer contributions to their retirement account.

Vesting rules can vary by employer, but both 403(b) and 401(k) plans may have vesting schedules, which could affect the timing of when employees fully own their employer contributions.

Tax Benefits for Retirement Savings

Both 403(b) and 401(k) plans offer tax advantages for retirement savings:

Contributions are typically made on a pre-tax basis, reducing your taxable income in the year of contribution.

Earnings within the account grow tax-deferred, meaning you don't pay taxes on investment gains until you withdraw the money in retirement.

At retirement, when you withdraw funds, you pay ordinary income tax on the distributions.

Eligibility Requirements for Catch-up Contributions

To be eligible for catch-up contributions in both 403(b) and 401(k) plans, you generally need to be at least 50 years old. Here are some additional details:

403(b): Individuals aged 50 or older can make catch-up contributions of up to an additional $7,000, on top of the regular contribution limit.

401(k): Individuals aged 50 or older can also make catch-up contributions of up to an additional $7,000, above the regular contribution limit.

It's important to note that plan-specific rules may vary, so it's advisable to check with your specific plan administrator for details regarding contribution limits and eligibility requirements for catch-up contributions.

It's also worth noting that 401(k) plans are typically managed by mutual fund companies, whereas 403(b) plans are more frequently overseen by insurance companies. This distinction is one of the reasons why many 403(b) plans have a more limited selection of investment choices and prominently emphasize annuities. In contrast, 401(k) plans commonly provide a broader range of mutual funds for participants to choose from.

Frequently Asked Questions (FAQs)

financial advisors and retirement planners

Let's consider some common questions on 401k and 403b plans.

What are 403(b) and 401(k) Contribution Limits?

401(k) and 403(b) are employer sponsored retirement plans that come with contribution limits. In 2022, employees could contribute up to $20,500, and this limit increased to $22,500 in 2023. For those aged 50 and older, an additional catch-up contribution of $6,500 is allowed, reaching a maximum of $30,000 in 2023 for them.

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

Yes, if your employer offers both a 403(b) and a 401(k), you can contribute to both plans. Nevertheless, there are limits on the combined total of salary reduction contributions you can make in a tax year. For 2023, the limit is $22,500, and it's increased to $23,000 for 2024.

Is a 403(b) a Good Retirement Plan?

A 403(b) plan is a solid retirement savings option, especially for individuals working in nonprofit organizations. It operates similarly to a 401(k) and offers various benefits, including tax-deductible and tax-free contributions, a Roth IRA option, potential employer matches, and diverse catch-up contribution limits.

How is a 403(b) vs. Roth IRA?

While Roth IRAs enable your contributions to grow tax-free, you can contribute a larger sum to your 403(b) plan. Additionally, 403(b) plans may offer the enticing option of employer matches, essentially providing free money to boost your retirement savings.

Which plan should I choose?

Your retirement plan is not strictly your choice to make, since it depends on the type of organization where you are employed and what your employer is willing to offer.

Whatever the plan you are offered, the more important task is to maximize your investment gains from a 401k or a 403b plan. And it is advisable to collaborate with seasoned investment professionals such as Ekenna Anya-Gafu, Wealth Management President at Bay Street Capital Holdings. He's an expert on all things retirement and can help you reach your financial goals quicker.

Ekenna works as part of an accomplished team at Bay Street, a well-rounded group of investment specialists, covering various areas including public equities, venture capital, real estate and alternative investments. As experts, they can help you in selecting suitable investments and funds, as well as structuring a high-performing portfolio for your 403(b) or 401(k) retirement savings.

Bay Street Capital Holdings

Bay Street Capital Holdings

Bay Street Capital Holdings, situated in Palo Alto, is a well-known wealth management firm. Under the leadership of William Huston, a three-time honoree on Investopedia's Top 100 Financial Advisors list, the company emphasizes comprehensive risk management as a priority over solely focusing on profit maximization.

It's worth mentioning that Bay Street Capital is one of only two Black-owned businesses among the nineteen distinguished firms in California. Their commitment to diversity and making a positive social impact has garnered them acclaim, including being finalists in respected industry awards.






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