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Differences Between 401(k) and 403(b)

Posted By Jim On 08/17/2006 @ 9:13 am In Investing,Retirement | 16 Comments

I was recently asked by a friend what the differences are between a 401(k) and a 403(b) to which I answered, very little. Both are offered by your employer, both may or may not feature employer matching contributions, both take contributions pre-tax up to a specified yearly limit, both are called “defined contribution” plans (versus “defined benefit” like pensions), and both are great ways to save for retirement. The differences between the two types of plans have been greatly minimized with the passing of the Economic Growth and Tax Relief Reconciliation Act of 2001 [3].

Remember, the names of these plans are derived from the section of the United States Internal Revenue Code under which they are defined. The three main ones are the 401(k), the 403(b), the 401(a) and the 457. So, it’s not necessarily the case that the plans are different, they’re just specified in different sections.

That being the case, the main difference is that the 401(k) is offered by for-profit businesses whereas the 403(b) is offered by not-for-profit businesses. [The 401(a) and the 457 cover employees of state and local governments and some other tax-exempt organizations.] For all intents and purposes to the employee, there are very few other differences (you can get your money out earlier than 59.5 under certain circumstances) but there is proposed legislation to bring the two plans even closer together.

If you’re deciding between two jobs (even if it’s your current job versus your potential new job), one that offers a 401(k) and another that offers a 403(b), rest assured that they’re basically the same so it should not affect your decision.


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[3] Economic Growth and Tax Relief Reconciliation Act of 2001: http://en.wikipedia.org/wiki/Economic_Growth_and_Tax_Relief_Reconciliation_Act_of_2001

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