NAVIGATING RETIREMENT OPTIONS: 401K VS 403B

Millions of Americans rely on the 401k and 403b employer-sponsored retirement plans to build their nest eggs. While these plans are widespread, the differences between them aren't always clear. Understanding these nuances is important for making informed decisions about your retirement savings. Let’s explore both options to see how each lines up with your goals and how you can make the most of the tax advantages and contribution limits available with these plans.

WHAT IS A 401K PLAN?

A 401k plan is a retirement savings account offered by private, for-profit companies to their employees. It's an employer-sponsored retirement plan that allows you to save and invest a portion of your paycheck before taxes are taken out, effectively reducing your taxable income.

There are a wide range of employers in the private sector who provide 401k plans, from small businesses to large corporations. These plans help employees prepare for retirement while taking advantage of tax benefits and potential employer contributions.

WHAT IS A 403B PLAN?

A 403b plan is a retirement savings account designed primarily for employees of tax-exempt organizations, such as non-profit organizations, educational institutions and certain governmental entities. Similar to a 401k, it allows you to contribute a portion of your salary into a tax-advantaged account, promoting long-term retirement savings.

Employers that typically offer 403b plans include charitable agencies, public schools, hospitals and religious organizations. If you are employed by a tax-exempt organization under section 501c3 of the Internal Revenue Code, you're likely eligible to participate in a 403b retirement plan.

401K VS 403B: HOW DO THEY COMPARE?

Here’s a closer look at how these two plans stack up:

TAX ADVANTAGES

In terms of tax benefits, both plans allow you to make contributions with pre-tax dollars, effectively reducing your taxable income in the year of contribution. The funds then grow tax-deferred, meaning you won't pay income tax on the earnings until you withdraw them during retirement. This tax advantage can enhance the growth of your retirement savings over time.

Both plans also have identical annual contribution limits established by the IRS. For 2025, you can contribute up to $23,500 in pre-tax dollars to either a 401k or a 403b plan. If you're age 50 or older, you're eligible for an additional catch-up contribution of $7,500, bringing your total potential contribution to $31,000. These limits remain the same for both plans, providing ample opportunity to maximize your retirement savings The IRS allows a total of up to $70,000 ($77,500 including catch-up contribution) between both employer and employee contributions to be saved in a 401k for 2025.

However, the 403b plan offers a unique advantage for long-term employees of certain organizations. If you've completed at least 15 years of service with the same employer, you may qualify for an additional catch-up contribution of up to $3,000 per year. This feature can significantly boost your retirement funds if you meet the criteria.

INVESTMENT CHOICES AND FLEXIBILITY

Investment options are another key consideration when comparing these plans. A 401k plan occasionally offers a broader range of investment choices, including mutual funds, stocks, bonds and sometimes even self-directed brokerage accounts. This variety provides flexibility to tailor your portfolio according to your risk tolerance and investment preferences.

In contrast, 403b plans usually have more limited investment options. They often focus on mutual funds and annuities, which can restrict diversification. While mutual funds offer a range of investment strategies, the absence of direct investments in stocks and bonds may limit your ability to fine-tune your portfolio.

EMPLOYER CONTRIBUTIONS AND REGULATIONS

Employer contributions differ between the two plans. In a 401k plan, employer matching contributions are more common and often more substantial. Employers may match a percentage of your contributions, significantly enhancing your retirement savings.

Conversely, employer matching is less prevalent in 403b plans. Non-profit organizations and public sector employers might offer limited or no matching contributions. This difference can impact the growth of your retirement account over time.

Regulatory distinctions also play a role. 401k plans are subject to the Employee Retirement Income Security Act, which imposes strict fiduciary standards and compliance requirements. This regulation provides protection for participants but can increase administrative costs for employers.

Some 403b plans, particularly those sponsored by government entities and religious organizations, may be exempt from certain ERISA requirements. While this exemption lowers administrative burdens and costs, it may also mean fewer regulatory protections for participants.

MAKING THE RIGHT CHOICE FOR YOUR FUTURE

Planning for retirement can be complex, but you don't have to navigate it alone. At Edelman Financial Engines, we're committed to helping you make informed decisions tailored to your unique situation.

Contact Edelman Financial Engines for personalized advice to set your retirement planning on the right track.