403(b) vs. 401(k) Retirement Accounts: What's the Difference?

It's More Than Just the Type of Employer

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The two most common forms of retirement accounts for employees are the 401(k) and 403(b). The 401(k) retirement plan is offered mostly by for-profit companies, while the 403(b) is used by non-profits. Occasionally, they are both offered by the same employer.

Learn the key differences so that you can choose between them if you need to.

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

 401(k) 403(b) 
Employer Type Usually offered by public companies Usually offered by non-profits 
Investment Choices Stocks, bonds, mutual funds, variable annuities, index funds, or ETFs Limited to mutual funds and annuities
Single Employee Solo 401(k) for one-person businesses No solo version
Plan Limits No extra contributions Qualified organization employees with 15 years can contribute more

The Type of Employer

A 401(k) retirement plan is offered mostly by for-profit companies to help employees save for retirement. Whether your employer offers a 401(k) depends on the state you live in and the size of the business. Many states have laws that dictate when an employer needs to provide retirement options for their employees.

If you're the business owner and the only employee, you can set up a one-participant 401(k) for yourself and your spouse.

A 403(b) can only be offered by public schools, colleges, universities, churches, or 501(c)(3) charities. To be eligible for this type of plan, you'll need to work for one of these types of employers.

Investment Choices

Another difference between a 403(b) and a 401(k) is the investment choices. Most 401(k) plans offer different types of mutual funds as their investment choices, but they can include other investment types. 403(b) plans can only offer mutual funds and annuities. Technically, 403(b)s are more limited on investing options than 401(k)s, but if there is a choice between mutual funds, then a 403(b) can be nearly as flexible as a 401(k).

You can’t withdraw money out of most 401(k) plans until you reach age 59 1/2 or meet certain IRS conditions, and you have to begin taking minimum withdrawals by age 72. Roth 401(k) plans are similar but offer tax advantages.

You pay taxes upfront in Roth 401(k) plans and no taxes when you withdraw from the account. If you can choose between a Roth 401(k) and a traditional 401(k), you should estimate your taxes when you think you might begin taking distributions, compare them to your current taxes, and choose the one that offers you the lowest taxes.

401(k)s and other company-sponsored retirement plans also limit the investment choices you have. Unlike an IRA, where you can choose between many traditional investment products, the average 401(k) plan in 2016 had only 27 choices. Fees also eat into your balance. Depending on the plan's quality, you may be stuck with less-than-ideal options from a fee perspective.

A 401(k) is a qualified plan, which means that your company gets a tax benefit for contributing money to the account on your behalf, and you can contribute part of your paycheck to the plan before the IRS taxes the funds.

Qualified plans allow employees to contribute up to $19,500 in 2021. In addition, if you're age 50 or older, you can contribute an additional $6,500, referred to as "catch-up" contributions. In 2022, the contribution limit increases to $20,500, though the catch-up contribution limit remains the same.

Single Employee Options

Small business owners who are their only employee can open their own 401(k). You can find these at brokers that offer retirement plans.

Plan Limits

One difference applies to a small subset of employees—if you have 15 years of service, and your company is considered a “qualified organization,” you may be eligible to contribute more to your 403(b) on top of the annual limitation of $19,500 or $20,500. This option is not available with a 401(k).

403(b)s have had the reputation of having higher fees than 401(k)s, but recent trends have seen 403(b) plans emerge with lower fees.

Other Considerations

There are other benefits to nonprofits that might make a 403(b) more attractive, but the type of plan doesn’t matter to the vast majority of employees. If you have the choice, one isn’t necessarily better than the other.

Instead of figuring out whether one is better, evaluate the investment options and fees that are inside the plan. Generally, the larger the company, the lower the plan fees, because more people participate, which brings costs down.

If you work for a small company, consider lower-cost index funds within the plan as an investment option instead of placing money in higher priced actively managed funds.

If you don't have a choice between the two, you'll need to accept the one that is offered.

If your employer matches your deposits, you'll earn more in the long run by participating in the plan up to the maximum amount they’ll match.

The Bottom Line

Both the 401(k) and 403(b) are great retirement plans. Since you're more than likely limited to one or the other, the best choice is to get the one you can. Make sure you pay enough into it to max out your employer's matching contributions. Since the key difference is the types of investments within each type of plan, become familiar with each of the types so that you can choose the ones that fit your goals and needs.

If you're lucky enough to have a choice between the two, you'll need to weigh the investment choices more carefully. A 401(k) gives you much more flexibility when you're choosing your investments. A 403(b) can only offer mutual funds and annuities, but is not inherently bad, because there are thousands of mutual funds to choose from. Annuities can also provide good retirement income if you choose the right one.

Mutual funds are fairly straightforward investments, while annuities can become very complex. Make sure you talk to your benefits provider or a financial planner if you're limited to a 403(b) so that you understand how the annuity works before you choose.

The Balance does not provide tax, investment, or financial services and advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Investing involves risk, including the possible loss of principal. Investors should consider engaging a financial professional to determine a suitable retirement savings, tax and investment strategy.