Employer-sponsored retirement plans come in a few flavors. Two common types: the 401(k) and 403(b). While both offer tax benefits and easy ways to invest for later, there are some key differences. In most cases, you won’t have to choose between them because your employer determines the plan type available to you. Still, it’s possible you may have both if you change jobs and have a 401(k) at one point and a 403(b) at another, and even if not, it’s helpful to know how these retirement plans compare.
What is a 401(k) plan?
A 401(k) is a workplace retirement plan that many for-profit employers offer. It’s the most popular retirement savings plan, with around 70 million Americans—or about 42% of the working population—using a 401(k) to invest money they’ll use in retirement.1
Advantages of 401(k) plans
- The money you contribute to a traditional 401(k) is automatically deducted from your paycheck, making it a simple way to save for retirement.
- Your employer might offer a dollar-for-dollar or percentage match on your contributions, up to a certain limit, to help your savings potentially grow more.
- Contributions to a traditional 401(k) can be tax-deductible, thus reducing your taxable income for the year in which you make them.
- Your money grows tax-deferred, so you won’t pay taxes until you withdraw money later. With Roth 401(k)s, though, you contribute pre-tax dollars and don’t have to pay taxes when you withdraw.
- You can invest in a variety of assets, including stocks, bonds, mutual funds, and exchange-traded funds (ETFs), if your plan offers them. Most plans may offer only mutual funds as the other types of assets (stocks, bonds, and ETFs) are typically less available, unless your plan offers a self-directed brokerage option or specific investment options.
- If you work for yourself instead of for an employer, you could consider opening a self-employed 401(k), which offers the same benefits as a standard 401(k).
Disadvantages of 401(k) plans
- Any money you withdraw from a traditional 401(k) counts as taxable income. Withdrawing too much could push you into a higher tax bracket, causing you to owe more money on some of your income.
- Withdrawing funds before age 59½ usually results in a 10% early withdrawal penalty, unless you meet one of the IRS exceptions, such as leaving your employer in the year of turning 55 or after age 55.2 That’s on top of taxes you’d owe.
- You typically must begin taking required minimum distributions (RMDs) of pre-tax balances starting at age 73. If you are still working at age 73, you can delay taking your RMDs until you retire, unless you own 5% or more of the business sponsoring the retirement plan.
- They’re subject to annual contribution limits. In 2025, the annual 401(k) employee contribution limit is $23,500. People who are age 50 and over can add an extra $7,500 (or $11,250 for those 60 to 63 years old, if your plan allows it).
What is a 403(b) plan?
A 403(b) is a workplace retirement plan for employees who work in tax-exempt organizations such as schools, religious institutions, and health care. Like a 401(k), employers offer this benefit to attract and retain workers. With approximately $1.3 trillion in assets as of 2024,3 403(b)s are popular retirement savings accounts. While they’re less common than 401(k)s, 403(b)s are powerful tools for helping you reach your retirement goals, offering many of the same benefits as 401(k)s.
Advantages of 403(b) plans
- A 403(b) plan makes investing easy by automatically deducting a certain amount you choose from each paycheck.
- Your employer might also add money to your 403(b) by offering a set amount or matching some or all of your contributions. Sometimes your employer may contribute to a 401(a) plan to preserve your ability to maximize contributions to your 403(b) plan.
- You won’t owe taxes on a 403(b) until you make a withdrawal, unless you are making a Roth deferral.
- If you’ve been with your employer for 15 years or more, you may be able to contribute an extra $3,000 per year, up to a lifetime limit of $15,000. IRS rules can be complex and additional rules may apply as plans vary, so check with your employer to see if this is an option.
Disadvantages of 403(b) plans
- In most cases, if you withdraw funds before age 59½, you’ll have to pay a 10% early withdrawal penalty, along with taxes unless you leave your employer in the year of turning 55 or after age 55.2
- RMDs typically kick in when you turn 73, though some long-established 403(b) plans may have an extension to age 75. Like 401(k)s, if you are still working at age 73, you can delay taking your RMDs until you retire, unless you own 5% or more of the business sponsoring the retirement plan.
- Your investment options are generally limited to annuities and mutual funds.
- Like 401(k)s, the amount you can contribute to a 403(b) is limited. They have annual contribution limits mirroring 401(k) limits. In 2025, the annual 403(b) employee contribution limit is $23,500. 403(b)s allow catch-up contributions too. Workers age 50 and older can contribute an additional $7,500; those age 60 to 63 can kick in an extra $11,250 if your plan allows it.
Similarities between 401(k)s and 403(b)s
Because they’re both tax-advantaged workplace retirement plans, they share many features.
- Traditional 401(k) and 403(b) plans both allow you to contribute via pre-tax automatic payroll deductions. Roth 401(k) and Roth 403(b) plans both allow you to contribute post-tax contributions through automatic payroll deductions.
- The annual contribution limit is the same for both, with those who are age 50 and older able to make additional catch-up contributions.
- Both are investment accounts that allow you to use the power of compounding to potentially build your retirement savings. That means your contributions could benefit from investment gains—and then that new, higher account balance could go on to generate additional gains. However, compounding does not guarantee a profit or protect your money from a loss in a declining market.
- Employers may choose to contribute matching dollars to your account based on your contributions, which is like giving you free money.
- You may be able to take a 401(k) loan or a 403(b) loan. Keep in mind, the loan is from your own savings, and you are paying it back, with interest, to yourself. But if you separate from your employer, you might owe the entire balance of your loan immediately.
- RMDs apply to both and generally begin at age 73 unless you are still working (though that age could be 75 for some long-standing 403(b)s). Your total retirement account balance and an IRS life expectancy factor determine the amount you must withdraw each year.
- You’d face penalties for making withdrawals before age 59½ with either account. You may be taxed on withdrawals too, whether you make them before or during retirement.
- Both may be available as Roth accounts. This means they can be funded with dollars you’ve already paid taxes on. Contributions can always be withdrawn tax- and penalty-free, and investment gains can be withdrawn tax- and penalty-free, provided you first funded a Roth account at least 5 years earlier and are at least 59½ years old.4
401(k) vs. 403(b): How to choose
You’ll probably never have to choose between a 401(k) and a 403(b) because employers generally offer only one or the other based on whether or not they’re a for-profit business, though there are some exceptions. Some higher education institutions offer employees the choice, or you may have 2 employers at the same time—one that offers a 401(k) and another that offers a 403(b). You could technically contribute to both at once, but it could pay to be strategic.
For instance, you might prioritize contributing to a 401(k) if that employer offers a higher match or you want a wider range of investment options. On the other hand, you may be drawn to a 403(b) if you’ve been with the company for at least 15 years and are eligible for higher contribution limits. Either way, you can only contribute up to the annual limit in total across both accounts. Your overall employee contribution limit doesn’t double if you have 2 workplace accounts.
How to invest through a 401(k) or 403(b)
To invest through a 401(k) or 403(b), you must be eligible for a plan through your employer. If you don’t have access to a 401(k) or 403(b), you can still get tax benefits while you save for retirement. If you work for a company that doesn’t offer a workplace retirement plan, consider opening an individual retirement account (IRA). If you work for yourself, you may explore opening a solo 401(k), SEP IRA, or SIMPLE IRA.
If you are eligible for a 401(k) or 403(b), follow these steps to get invested.
1. Check whether you’re automatically enrolled
Some employers sign up new employees at a relatively low contribution rate without you having to take additional steps. If you weren’t defaulted into their plan, you should receive information about how to enroll.
2. Set up payroll deductions
Even if you’re automatically enrolled, you may want to change the amount that gets contributed from each paycheck. Consider contributing at least as much as your employer will match so you don’t leave money on the table. Then work up to Fidelity’s suggestion of saving at least 15% of your pre-tax income, including any employer match, for retirement.
3. Decide if you want help investing
The financial firm that holds your retirement account may offer the option of working with a financial professional who could help you choose which investments to buy and even monitor their success and make changes. Look into costs at that firm first. Or you could go the DIY route and choose your own investments.
4. Research the investment options available to you
Employers tend to simplify investment options in 401(k)s and 403(b)s by offering target date funds, among other investments. Target date funds are ready-made portfolios based on a timed end goal, like retirement in a certain number of years from now. Their asset allocation gradually gets more conservative as the fund approaches that end goal.
You may also have access to asset allocation funds, which can provide diversification—or spreading your investments across different asset classes (like stocks, bonds, and short-term investments)—seeking to minimize your overall risk. Asset allocation funds are similar to target date funds in that they’re a premade, diversified portfolio, but they don’t automatically adjust based on a target date.
5. Check in on your investments
Periodically review your investments (at least once a year but can be as often as quarterly) to ensure they still support your financial goals. Make changes—or work with a professional to make adjustments—if necessary.