401K vs 403B Retirement Plans: Difference and Comparison

While I am pretty sure that most of you have a handful of information about the 401k retirement plan, not many of you will be aware of the 403b retirement plan.


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A 403b retirement plan is a tax-deferred retirement scheme that allows you to save some pretax dollars, up to $16,500 per year, from your annual wage.

In case, if you have chosen some mutual funds and annuities as your money for investment, then the 403b plan is monitored by the wealth management company chosen by the organization you work for.

Key Takeaways

  1. 401k and 403b are retirement savings plans that allow employees to save for retirement on a tax-deferred basis.
  2. 401k is offered by for-profit companies, while non-profit organizations, schools, and hospitals provide 403b.
  3. 401k may offer more investment options than 403b.

401K vs 403B Retirement Plans

The difference between 401K and 403B retirement plans is that 403b is executable only if you are a part of any non-profitable organization like a hospital or an educational institute. However, a 401k retirement plan applies to all employees whose organization is profitable and has its own set of advantages.

401K vs 403B Retirement Plans


Comparison Table

Parameter of Comparison401k Retirement Plan403b Retirement Plan
DefinitionA 401k Retirement Plan is a post or pretax plan where employees can make tax-deferred contributions from their annual wages.The 403b Retirement Plan is a very niche plan that is limited to nonprofit organization employees like Schools, government institutions and hospitals.
ParticipantsRegular daily wage earner or employee.Teachers, Doctors, Government Employees, Nurses, etc.
Institution TypeAny profitable firm or institution is allowed to give its employees the benefits of this scheme.All the non-profitable firms or institutions are allowed to give their employees the benefits of this scheme.
Employer Match RateThe 401k retirement plan offers significantly higher employer match rates comparatively.With all the legal rights for the institution to allow employees matches to its employees, the match rates are relatively lower. So the employees do not lose an ERISA exemption.
Program AdministratorsMost mutual fund companies administer the 401k retirement plan.The 403b retirement plan is monitored and administered by different insurance companies.
Limits for Investment OptionsThe 401k retirement plan is limited by a lot of mutual funds investment opportunities.Majorly different annuity options limit the 403b retirement plan.


What is 401K?

A 401k is a tax-deferred retirement plan that allows any organisation’s employees to save and invest their pretax money based on sponsorship from the employer.

As per the IRS guidelines and the maximum limit, the employee can decide how much money they want to deduct from their wages and contribute to the 401k retirement plan.

However, you are never forced to follow the scheme as it is completely optional. It is entirely up to the plan sponsor, that is, your employee, to plan the retirement scheme as per the rules and guidelines of the government.

Thus they should be well aware of the following concepts before planning;

  1. What is the maximum limit for a Retirement plan 401k?
  2. What is the age limit for the plan?
  3. What are the minimum and maximum tax deductions they can avail of?
  4. What is the investment relocation option they could get from this scheme?

The various investment options that the employee will have under this plan are;

  1. Exchange-traded funds (ETFs)
  2. Cash Alternatives
  3. Different Investment Vehicles

Also, we must make you understand that this is not, in any case, your savings account. A 401k is just a retirement plan that is not easily accessible in case of sudden urgency or emergency.

Therefore, it is equally important to have your savings in place for difficult times and plan your “Summary Plan Description” separately for the 401k investment scheme.

Thus, employees should understand that by contributing their part of their wages towards the 401k retirement plan, they are saving their pre-tax income and amount tax-deductible.


What is 403B?

A 403b retirement is an annuity plan that is tax shredded for employees of any nonprofit organization, including schools, medical institutions, and hospitals.

In this plan, either the employer can contribute on behalf of the employees, or the employee may decide to contribute some part of their taxable income on their own.

As per the government guidelines, all the employees who come under Code Section 501(c)(3) tax-exempt organizations are eligible to apply for a 403b retirement plan.

The primary benefit of this plan is that it is pretax, i.e. the amount you put in a 403b retirement plan will not be taxed by the government.

The various employees that can avail of the benefits of this plan are;

  1. Doctors
  2. Teachers
  3. Nurses
  4. Government employees etc.

As per the plan termination guidelines mentioned by the state government, one can quickly terminate the plan at their convenience.

Thus, employees should comprehend that subsidizing their part of wages towards the 403b retirement plan saves their pre-tax income and amount of tax-deductible anyhow in any case possible.


Main Differences Between 401K and 403B]

Although both are pre-tax savings methods, there is a lot of difference between 401k and 403b retirement plans when it comes to participating audiences and guidelines.

  1. 401K offers more investment options like stocks, bonds, money market funds, etc., and 403b offers mutual fund and annuities investment options.
  2. 403b has relatively less government regulation when compared to a 401k plan.
  3. In addition to the $19000 contribution limit, which is the same for both plans, the eligible participants of 403b can contribute an extra $3000 if they have been working in one single organization for more than 15 years.
  4. 403b plan requires all the high-cost options, and therefore the fees are less in the case of 401k plans comparatively.
Difference Between 401K and 403B Retirement Plans
  1. https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-403b-tax-sheltered-annuity-plans
  2. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1937795
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