401(k) vs 403(b): Differences, Similarities, and Which One Is Better?

The 401(k) and 403(b) are two of the most popular retirement plans available to employees in the United States. They are legally considered qualified tax-advantaged retirement plans offered by employers for their employees. The key difference between these two employer-sponsored retirement plans comes down to the employer type. Traditional 401(k) plans are available to private for-profit organizations, whereas 403(b) plans are available for government organizations and organizations registered as non-profits.


  • The main difference between a 401(k) and 403(b) plan is the employer type
  • Participation in these plans is completely voluntary by employees
  • 401(k) earnings grow tax-deferred 
  • 403(b) plans are available for a non-profit organizations, government organizations, public schools, and ministries

401(k) Explained 

The 401(k) plan is the staple traditional American retirement plan. The 401(k) is a tax-deferred employer-sponsored retirement plan available for eligible employees. It allows employees to make tax-deferred contributions from their base salary with an option for a post-tax and pre-tax basis.

Employers who extend 401(k) plans to their employees tend to have matching or “non-elective contributions” to the plan. Some employees even have a profit-share option available within the plans. Contributions made to your 401(k) reduce your taxable income at the end of the year. It’s worth noting that participation in a 401(k) plan is optional for employees and not required.

Distributions, including earnings, are included in taxable income at retirement (except for qualified distributions for Roth IRA accounts)1 . The distributions from a 401(k) are taxed as ordinary income. The amount of taxes you pay on your distributions will vary based on the type of 401(k) plan you have, the age at which you start taking distributions, and the amount of distribution you take out each year.

It’s worth noting that 401(k) plans have yearly contribution limits 2 which are subject to change. They also permit catch-up contributions for participants over 50. This allows people to “catch up” and contribute more to the plan if it wasn’t previously available to them. Participants in a 401(k) plan must hit age 59.5 before they are eligible for distributions or face an early withdrawal penalty.

403(b) Explained

The 403(b) plan is available to employees of non-profit organizations, public schools, government organizations, and ministries. It is also commonly referred to as “tax-sheltered annuity”  or “TSA”. Funds invested in 403(b) plans can only invest in mutual funds and annuities. Generally speaking, 403(b) plan works in a very similar fashion to a 401(k) plan.

Eligible employers for 403(b) plans include:

  • Public and some private school employees
  • Nurses and doctors working for non-profit hospitals
  • Government employees
  • Librarians 
  • Non-profit organizations 

The vesting schedule for 403(b) plans tends to be shorter than those of 401(k) plans. However, vesting schedules will vary from employer to employer. The yearly contribution limits for 403(b) plans are the same as 401(k) plans and so are the catch-up contributions.

Participants in a 403(b) plan must also wait until age 59.5 before they are eligible for distributions. Just like a 401(k) plan, a 403(b) plan has the traditional option and Roth option. A Roth 403(b) is funded with after-tax contributions which don’t extend any immediate tax benefits. However, distributions from a Roth 403(b) are not taxable. One of the most notable differences between a 401(k) and a 403(b) is the fact that a 403(b) plan can have an ERISA exemption.

403(b) and ERISA

The Employee Retirement Income Security Act (ERISA) 3 governs qualified, tax-deferred retirement investments, like 401(k)s and 403(b)s. However, 403(b) plans are not subject to the same rules under ERISA as 401(k) plans. Below are some of the exemptions and rules for the 403(b) plan under ERISA:

  • 403(b) plans are exempt from nondiscrimination testing
  • Employers can’t be compensated beyond reasonable expenses related to the employer’s duties under the stated contract
  • The employer can’t make contributions to the 403(b) plan or they lose their ERISA exemption
  • A non-ERISA plan with over 100 participants isn’t subject to an annual audit
  • A non-ERISA plan does not need to provide a Summary Plan Description to employees who participate 

It’s worth noting that 403(b) plans are legally eligible to provide employer matches to their employee’s contributions, however, most employers avoid doing this because it will cause them to lose their ERISA exemption.

Main Differences Between 401(k) and 403(b)

While both plans tend to be very similar in structure, there are some key differences:

  • The main difference between a 401(k) vs 403(b) plan comes down to the employer type
  • A 403(b) plan can have an ERISA exemption while a 401(k) plan can’t 
  • Eligible employers for a 403(b) plan are limited to public school employees, nurses and doctors, government employees, librarians, and non-profit organizations
  • The vesting schedule for a 403(b) plan tends to be shorter than that of a 401(k) plan
  • 401(k) plans offer much higher match programs and can accumulate more money over the lifespan of the the plan
  • Expenses for non-ERISA 403(b) plans tend to be much lower since they don’t have the same reporting requirements as standard 401(k)s

As you can see the two plans are similar but have some key differences that make them unique. It’s important to get familiar with your 403(b) withdrawal rules if you have an account. You can learn what limitations and advantages you have within the rules and guidelines that govern your plan.

Similarities Between 401(k) and 403(b)

A 401(k) and 403(b) plan have unique similarities and are great retirement options for eligible employees. The one available to you will depend on the type of company you work for.

  • Both plans are qualified tax-advantaged plans offered to employees by employers 
  • A 401(k) plan and a 403(b) plan both have a traditional option as well as a ROTH option
  • Both plans have the same annual contribution limits as well as the same catch-up contributions limits
  • Participants in a 401(k) and a 403(b) plan must hit age 59.5 before they are eligible for distributions 

It’s worth noting that some of the differences and similarities with these retirement plans will also vary greatly by the size of the employer and their management philosophy.

Pros and Cons of a 401(k) 

The 401(k) is the main retirement option for employees who work at public and private companies. They offer pros and cons employees should be aware of.


  • 401(k) plans have federal protection by ERISA
  • Employers offer matching contributions with 401(k) plans which can help you save more
  • 401(k) plans have high annual contribution limits which allow you to reduce your taxable income
  • You can take a 401(k) loan against your balance
  • If you leave your employer you can transfer your 401(k) to your new employer


  • 401(k)s generally have limited investment options
  • There are early withdrawal fees if you want to take money out before age 59.5
  • Depending on the plan administrator, the fees can be higher with traditional 401(k) plans
  • Plan participants usually make their own investment selections

Pros and Cons of a 403(b)

A 403(b) plan offers unique pros and cons and it’s important to be aware of them if your employer offers one.


  • Flexibility in employee contributions
  • Shorter vesting schedules than a 401(k) plan
  • 403(b) may or may not be subject to ERISA
  • Allow for extra catch-up contributions


  • Limited to a few investment choices
  • 403(b) plans are limited to specific employers
  • Penalties on early withdrawals before age 59.5
  • Employers tend to avoid matching because they will lose their ERISA exemption

Final Verdict

As you can see, the 401(k) and 403(b) plans have differences and similarities which make them unique. They also come with their own set of advantages and limitations that employees need to know. One isn’t necessarily better than the other. However, knowing which one is available to you will help you better understand your retirement options.

1 – 401k Distributions


2 – 401k Contribution Limits


3 403b (ERISA)