403(b) vs. 401(k): What’s the Difference?

When it comes to saving for retirement, it’s important to understand your options. Figuring out which type of account to use is a big deal. For some workers, understanding the difference between a 401(k) and a 403(b) is important.


Photo by PT Money.

What is a 403(b), and How Does it Differ from a 401(k)?

In many ways, a 403(b) is like a 401(k). In fact, the contribution limits ($17,500 for 2013) are the same for both plans. The biggest difference between a 401(k) and a 403(b) is who these plans are meant for:

  • 401(k): Private sector employees. These plans are designed for those who work for companies. The companies can offer 401(k) plans as part of their benefits packages.
  • 403(b): These are plans set up for government and non-profit workers. If you work for a state government, or for a hospital or religious organization, you might have access to a 403(b).

With a 403(b), you can contribute up to the limit to a tax-advantaged account. In many cases, working for a non-profit or a government organization doesn’t exempt you from paying taxes. A tax-advantaged plan, where your money grows tax-deferred or tax-free, can provide you with benefits that add to the efficiency of your investments over time.

A 403(b) isn’t a pension, either. It’s a defined contribution plan, which means that what you get in the end depends on how much you put in on your own — and how well your investments do over time. A pension is a defined benefit plan, which means that your payout during retirement depends on a formula  (usually including years worked and salary at retirement), and is set.

Like a 401(k), you contribute your money prior to paying taxes. This means that you get a tax deduction for contributing now. Later, when you withdraw money from your account, you pay taxes on the contributions and the earnings. The 403(b) also comes with a Roth option, so if you are willing to make your contributions with after-tax dollars, your money will grow tax-free, and you won’t have to pay taxes on any of it when you withdraw it from your account during retirement.

There are some instances when some of your 403b options are limited, though. Like all plans administered by an employer, some are better than others. You might not have access to low-cost investment choices, or you might have limited choices when it comes to the types of investments you can make. If you qualify, you might be able to contribute to an IRA or a Roth IRA so that you can choose your own investments, and find lower-cost alternatives. You can also talk with your employer about offering other investment choices. Make sure you know what fees are being charged so that you can make a more informed decision.

Realize that access to a 403b might be affected by the hours you work, and there might be vesting requirements.

Roth 403(b) vs. Roth IRA

It’s important to understand the differences between a Roth 403(b) and a Roth IRA. Even though these are both Roth funds, and your after-tax contributions to both grow tax-free, the rules governing how you withdraw your money, and when, are different.

With a Roth 403(b), you follow the same rules as with a 401(k). You can only begin accessing your money without penalty when you reach age 59 1/2, or if you meet other very stringent conditions. This is different from a Roth IRA, in which you can withdraw contributions at anytime without penalty (withdrawing earnings is another matter with the Roth IRA). Your Roth 403(b), like any version of a 401(k), is also subject to Required Minimum Distributions once you reach age 70 1/2, while a Roth IRA is not.

Bottom Line

If you work for a government entity, or if you work for a non-profit with tax-exempt status, there is a good chance that you can save for retirement with a 403(b). Ask your employer about your retirement account options, and make sure you tax advantage of the ability to save for retirement.

About the Author

By , on Apr 17, 2013
Miranda Marquit
Miranda is a professional personal finance journalist. She is a contributor for several personal finance web sites. Her work has been mentioned in and linked to from, USA Today, The Huffington Post, The San Francisco Chronicle, The New York Times, The Wall Street Journal, and other publications. She also has her own personal finance blog: Planting Money Seeds.

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Leave Your Comment (3 Comments)

  1. rick says:

    I currently collect social security disability for a particular issue and have been classified as disabled for the past 15 years. I have a part time job and have contributed to a 403 b plan at a community college, which I have worked for for the last 13 years. The balance is now around 12,000. It is a perfect, part time job that includes benefits such as sick time and vacation time. I am now 50. In another 10 or so years I would like to cash out my 403 plan and use the money for a new car, a trip and the like. I don’t mind paying the taxes. However, my problem is that I am reading that one cannot access or cash out their 403 plan while working for the employer and that I would have to give up my part time job (which I other wise would keep indefinitely) Am I right in thinking this. What about the law that says one has to start accessing their 403/401 k when they are 70? What if I still have my part time job at the college at that point in time?

  2. Manette @ Barbara Friedberg Personal Finance says:

    Well-written article. You gave a very clear explanation for a lot of people who asks why 401K is discussed or mentioned more often than 403b.

  3. krantcents says:

    I have a 403B because I am a teacher. The biggest difference is ours is filled with annuities. I have only one or two investment choices that are mutual funds. Within those choices I have some flexibility. The cost normally are higher, however you can elect to lower your costs. They do not make it easy for you and there is poor communication about it.

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