Understanding 401(k) vs. 403(b) Retirement Accounts

Christian Worstell
In this article...
  • The differences between 401(k) vs. 403(b) retirement accounts are minor but important if you have one of these plans. Learn how these retirement plans vary and why it matters.

If you're a new investor, you might have questions about 401(k) vs. 403(b) plans. Both let you contribute pre-tax earnings toward your retirement. While these retirement plans offer similar benefits, they're sponsored by different types of employers. 

How Do 401(k) and 403(b) Plans Work?

When the company you work for offers a sponsored retirement plan, it could be either a 401(k) or 403(b), depending on the type of organization. With both plans, you set aside money for retirement before taxes, which lowers your taxable income. Often, employers match your contributions up to a certain amount, and some companies also offer profit-sharing on these plans.

The money in the account accrues on a tax-deferred basis, which means you don't pay taxes until you retire and begin to take withdrawals from your investments. At that point, you must pay income taxes on the money according to your tax bracket at the time of withdrawal. 

What Are the Differences Between 401(k) vs. 403(b) Plans?

You probably have a 401(k) plan if you work for a private, for-profit company. On the other hand, if you're employed by a government organization, such as a public school, or a nonprofit organization, you may have a 403(b) plan for retirement.

A 403(b) plan is also exempt from many of the provisions of the Employee Retirement Income Security Act. Under ERISA, 401(k) plans must perform annual nondiscrimination tests to ensure that highly compensated or management employees don't receive an unfair share of plan benefits. In contrast, this requirement only applies to 403(b) plans if your employer makes contributions on your behalf (matching funds, for example).

In addition to these current differences, the two types of plans once offered different types of investments. Until 1974, you could only invest 403(b) funds in annuities. Both plans offer investment options in various asset classes, including stocks, bonds and commodities. However, 403(b) plans include only registered investment funds, while 401(k) plans may also include unregistered funds.

Christian Worstell
About the Author

Christian Worstell is a senior Medicare and health insurance writer with HelpAdivsor.com. He is also a licensed health insurance agent. Christian is well-known in the insurance industry for the thousands of educational articles he’s written, helping Americans better understand their health insurance and Medicare coverage.

Christian’s work as a Medicare expert has appeared in several top-tier and trade news outlets including Forbes, MarketWatch, WebMD and Yahoo! Finance.

While at HelpAdvisor, Christian has written hundreds of articles that teach Medicare beneficiaries the best practices for navigating Medicare. His articles are read by thousands of older Americans each month. By better understanding their health care coverage, readers may hopefully learn how to limit their out-of-pocket Medicare spending and access quality medical care.

Christian’s passion for his role stems from his desire to make a difference in the senior community. He strongly believes that the more beneficiaries know about their Medicare coverage, the better their overall health and wellness is as a result.

A current resident of Raleigh, Christian is a graduate of Shippensburg University with a bachelor’s degree in journalism. You can find Christian’s most recent articles in our blog.

If you’re a member of the media looking to connect with Christian, please don’t hesitate to email our public relations team at Mike@MyHelpAdvisor.com.

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