403b vs. 401k – What’s the Difference?

Daniel Penzing
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401(k) vs 403(b) Comparison Chart

What Is a 401(k)?

The 401(k) is the most commonly used retirement program in America. Most large companies offer it as a means of helping their employees prepare for their golden years, and thanks to certain government-sponsored plans, some small businesses can qualify to offer it as well.

401(k) comes from the section of the Internal Revenue Code that deals with qualified retirement plans. While the retiree is receiving distributions from the plan, all of the plan’s earnings and gains remain tax sheltered until they’re withdrawn at retirement. In most instances, that’s when the last paycheck’s received.

What Is a 403(b)?

A 403(b) is a retirement savings plan available to certain public employees. An example of a public employee who has access to a 403(b) is a state government employee. It’s similar to the 401(k) plan for private sector employees.

The main difference between the two plans is that the eligibility for a 403(b) is based on your job, not your status as a self-employed individual. You also don’t have to wait until you are 50 to participate in your plan.

There are two main types of 403(b) plans, the Section 403(b) and the Section 403(b)(2). The first type is similar to the 401(k); the second type is a tax-sheltered annuity which is similar to a 403(b) for public employees.

If you’re interested in trying a 403(b), you’ll need to check with your employer to see if they offer one. However, you must wait until you have a job offer before you enroll in your plan.

What Are the Fees?

Once you’re enrolled, you’ll begin receiving communications from your 403b plan’s custodian. Be sure to open and read all of these. Sounds easy enough, but you’d be shocked how often we hear from folks who have simply ignored their account statements until they miss a payment or, even worse, get a tax bill.

Plan providers will often offer a variety of investment options. In some cases, you may be able to take part in as many as 25 different funds … don’t let that fact confuse you. You can choose to invest in as few or as many of those funds as you’d like. If it is a good fit for your needs, those funds can be automatically reallocated on a predetermined schedule, so you don’t have to worry about it.

Another common sidebar about fees is “Fiduciary fees.” Plan assets are held in trust, so plan representatives have an obligation to act in the best interest of the participants on a fiduciary basis. The good news is that the Department of Labor is enforcing those rules so that participants are getting the most bang for their buck.

How Can I Contribute to a 401k or 403b?

The thing about retirement plans is that you don’t need immediate access to the money. Rather, it’s based on the principle of investing.

When you invest, you’re putting money into an account that’s tied to a specific, long-term goal (in this case, retirement). When you’re investing, you place your money in stocks and bonds where you can reap big gains, but you also run the risk of losing your money.

The age at which you retire and how much money you’ve saved through the years will determine how comfortable you’re able to live once you’re no longer working. These decisions will affect your entire life, but they’re decisions that you must make when you’re young.

If you’ve started your career, it’s possible you don’t have any money to invest. However, the things you do in your early years, your savings, and how you manage your cash flow will make a big difference in your 401k contribution vs. 403b.

Are 403(b) Holders Vested?

401k plans are subject to ERISA, which means that the account must vest after a period of time. This is called the vesting schedule, and you have to work for your employer for a certain amount of time before you become vested.

After a set number of days or months of employment, you become vested. When you become vested, your employer must approve your plan account for distribution. This may include increasing your contribution limits, or making salary-reduction contributions on your behalf.

403k participants who are vested have full control over their account as soon as they become vested, which means that they can withdraw funds from the account in full.

There are no rules about when employees become vested, and the time differs from company to company and plan to plan. Employees don’t have to be in the company for a specific time, can have access to the available funds in their account when they are vested

Salary deductions are made on a pre-tax basis and, if not used to cover qualified expenses, are subject to income taxes when you receive distributions.

401k plan holders are subject to a vesting schedule before they gain total control over their account. 403b participants are accessible to their funds without any restrictions regardless of their employment duration.

Can I Take Out a Loan?

Yes, but it’s a bad idea. Let’s take a look at both types of account so you can make the right choice for you.

403(b) Plans

Congress created 403(b) plans to encourage employees to save for retirement.

These plans are included in section 403(b) of the Internal Revenue Code and are sponsored by government employers and non-profits (such as universities) that pay qualified employees a salary and not a wage.


Individual tax advantages: Qualified distributions from a 403(b) plan are excludable from income for federal tax purposes, given that the plan is administered correctly.

Qualified distributions from a 403(b) plan are excludable from income for federal tax purposes, given that the plan is administered correctly. Ineligible for both employee and employer contributions: Earned income doesn’t count when determining the amount of compensation that can be given as a 403(b) contribution (in contrast to a 401(k), which counts earned income for both employee and employer contributions).