403b vs 401k

retirement savings plan

Congratulations! You just landed that dream job you wanted so badly and now you feel as though you are on top of the world as you sit in this new employee orientation session, staring blankly at the wall just over the Human Resources Representative’s shoulder while he talks, and daydream of all the good days that lie ahead. You are suddenly snapped back from your daydream when the new guy sitting in front of you leans over to the woman sitting next to him and asks, “403b vs 401k. What’s the difference?”

Now, you lock your eyes dead center on this HR rep who has been up talking for the past few minutes, because you suddenly realize that you have no clue what this is, nor do you understand why it is important.

In the middle of all the excitement of this new venture and the thoughts of all the shopping you plan to do, trips you plan to take, and bills you plan to pay off, this HR Rep complicates things further when he asks all of you to reach into your orientation packet and pull out the form where you will designate contributions to the company’s 403b retirement plan on your behalf.

Up until this point, you thought the hardest decision you would have to make would be whether to eat at the company’s cafeteria, but now you sit looking over your shoulder at your new peers and wonder if you are the only one who does not know what a 403b is, nor how it functions. In the recesses of your mind, you ponder: 403b. vs 401k and you repeatedly ask yourself what the difference is.

403b vs 401k Similarities

We begin with the basics. 401k plans are retirement savings accounts offered to employees of for-profit organizations, while 403b plans are retirement savings offered to employees of tax-exempt, or not-for-profit organizations such as public schools, churches, governmental organizations, or hospitals. The overall goal is for the investor, or in this case, the employee to place money into this account, which is a long-term savings plan that hopefully will grow significantly as the money is invested in mutual funds or annuities and grows as the principle receives gains from interest and as the mutual funds or annuities increase in value. When discussing these retirement plan types, we must note the similarities between them - both good and bad.

Comparing the Good and the Bad


Both are deferred savings plans that allow an individual to move pre-tax income to a holding account that will allow that money to grow from interest gains that come through compounding and investment. Ideally, the money is left in that account until the individual reaches the retirement age of 66 in order for the person to receive maximum gain. Money may be drawn from the account without penalty after the account holder reaches the age of 59 and a half. 

As of 2018, the maximum contribution allowed for both retirement plans has been increased to $18,500 and, with the “catch-up” contribution provision allotted for individuals 50 years or older, contributions may be increased by an extra six thousand dollars per year to $24,500 per year. This provision allows individuals who began saving later in their careers to save enough money to live on during their golden years.  Employers who offer either plan may match employee contributions to their accounts.  Lastly, money may also be withdrawn early from the account for emergencies as long as the amount meets the approval of the employer.

Conversely, along with anything deemed to be “good,” we can almost always expect for there to be things that are “not-so-good.” As we continue to debate or contemplate between the two plans, we must mention the similarities that are not so pleasant.

For starters, you will pay a penalty if you withdraw money from either account before you reach the age of 59 and a half.  However, if a withdrawal is made from either account type due to an emergency, you will have to pay the amount borrowed back in order to avoid a penalty. Lastly, both plans require any account holder who reaches the age of 70 to receive monthly payments from either their 403b or 401k plan or face severe tax consequences.

403b vs 401k Difference

While the topic of the hour - which plan is better - still dances like sugarplums in your head, as you try to absorb all of this new information that the HR rep is throwing out and you realize you are stressed beyond belief just trying to retain it all, you slowly calm as you realize that the information that is being thrown at you is all right there on the handout that has been given to you. As a result, you relax. Every bit of information you need to know is available to you so you can make the most informed and effective decision between the 403b vs 401k.

The Good

403b pig

One good thing that institutions that offer the 403b plans are happy about is that these plans come with lower administrative costs than 401k plans. That is mainly because most non-profits do not have the higher annual profits of for-profit businesses or corporations. This allows them to provide their employees with the ability to save for retirement at a fraction of the costs of what some traditional businesses have to dole out.

One plus for the employees, is that any person who has worked for the same non-profit for a period of at least 15 years may contribute an additional three thousand dollars per year, according to the Internal Revenue Service’s 15-year rule. This rule was also established to give late contributors a chance to catch up and better prepare for retirement. The greatest plus of all in this scenario is, if the employer matches the account holder's contributions, whether it is a percentage, or better yet, if it is dollar for dollar.

The Not-So-Good

401k dice

Honestly, there is not much bad we can determine here when contemplating 403b vs 401k. The only not-so-good factor that comes to mind, is the fact that you do not get the bonus, or that extra three thousand dollar incentive to catch up if you are a late investor who has for the same non-profit for 15 years or more.  Other than that, if any two parties were caught up in an argument, or a discussion of 403b vs 401k, acting as the arbiter, we would have to say that 403b vs 401k should not even be an argument. They are both no-brainers. In this particular discussion, it is a win-win situation.

The greatest reason for this is because both 403b and 401k are so similar. The only determining factor regarding which plan you become enrolled is determined mainly by the type business you work for - profit or not-for-profit.

Investment Options

Generally, 401k plan participants had an array of investment options available to them, such as different mutual funds and annuities. On the other hand, in years past, 403b plans were relegated to investing primarily in variable annuities. These restrictions have since been removed and, now, those enrolled in 403b plans can invest in a variety of mutual fund and annuities through their plan administrators.


It is important to know that workers in today's climate must do all that they can to live below their means and they need to work as hard as they can to save money for retirement. As for the discussion of the day - 403b vs 401k - it really does not matter which one you choose to enroll in.  Any opportunity to put away money for retirement that cannot be taken away is money left on the table. Thus, you can be confident in making your decision because either option is an excellent way to save for your future.

Corporations, small businesses, and even the federal government work hard to make it easier for individuals to save for retirement. It is imperative to take advantage. Here are a few of things to remember when preparing finances for your future retirement:

  • Enrolling in your company’s 403b or 401k plan is not hard

  • Your company’s plan administrator is there to assist

  • Start as early as you can

  • Not participating is the equivalent to giving up free money

If you are still unsure about enrolling in your company 403b plan, if you work for a non-profit, or if you are employed by a for-profit company, your human resources administrator will have all the information that you need for your specific form of employment and retirement savings plans. All you need to do is set aside some time to stop by and ask all the questions that you have. As for 403b vs 401k, it is not complicated. The most important thing is to get all the information you need to start your savings plan today. Your future depends on it.

What are you waiting for? Get started on your retirement savings plan of choice today. With help from this article, we trust you can confidently make the right decision between the 403b and 401k. Happy saving!

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