401(k) vs 403(b): Key Differences Between These Retirement Plans in 2026

Both 401(k) and 403(b) plans help employees save for retirement through payroll deductions and offer similar tax benefits, but differ in investment options, fees, employer contributions, and ERISA protections.

In 2026, both plans have an annual employee contribution limit of $24,500. Employees aged 50 and older can contribute an additional $8,000, while those aged 60–63 are eligible for a higher catch-up limit of $11,250, if their plan permits. Employees with at least 15 years of service at qualifying organizations may also be eligible for a special 403(b) catch-up contribution.

Since employers determine which retirement plans they offer, most employees cannot choose between a 401(k) and a 403(b). The comparison below highlights their key differences.

401(k) vs 403(b): Which is better?

Neither plan is inherently better. Your choice depends on investment options, fees, employer contributions, and eligibility for special catch-up contributions. Here’s how they compare.

Which one should you choose?

• A 401(k) may suit you better if: You have access to a plan with a broad investment selection, competitive fees, and a good employer match.

• A 403(b) may suit you better if: You work for an eligible school or nonprofit and qualify for the 15-year service catch-up, or your plan offers competitive investments and employer contributions.

Ultimately, compare the actual plan documents, employer matching formula, vesting schedule, investment expenses, and available benefits before deciding.

What is a 401(k) plan?

A 401(k) is an employer-sponsored, defined-contribution retirement plan under Section 401(k) of the Internal Revenue Code (IRC). It allows employees to save part of their salary for retirement through automatic payroll deductions.

Employers can also contribute to employees’ accounts, often by matching a percentage of their contributions. Employees can generally choose between two contribution types if their plan offers them:

• Traditional 401(k): Employees contribute pre-tax income, reducing their current taxable income. They pay income tax when they withdraw the money during retirement.

• Roth 401(k): Employees contribute after-tax income. Qualified withdrawals, including investment earnings, are tax-free.

The IRS recognizes traditional, safe harbor, and SIMPLE 401(k) plans. Safe harbor 401(k) plans use qualifying employer contributions to satisfy certain annual non-discrimination testing requirements.

Who can offer a 401(k)?

Private, for-profit companies of any size can establish a 401(k) plan. Tax-exempt nonprofit organizations can also offer one, making it an option for employers that qualify for a 403(b) plan.

However, most state and local government employers cannot establish new 401(k) plans. According to the IRS, this restriction has applied since May 6, 1986, with limited exceptions for certain entities and existing plans.

What is a 403(b) plan?

A 403(b) is an employer-sponsored retirement savings plan under Section 403(b) of the Internal Revenue Code. Also known as a tax-sheltered annuity (TSA), it allows eligible employees to save part of their salary for retirement through payroll deductions.

Like a 401(k), employees can make traditional pre-tax contributions or Roth contributions if their employer’s plan permits them. Employers may also contribute to employees’ accounts through matching or other contributions.

Which employers offer 403(b) plans?

Eligible employers include:

• Public schools, colleges, and state universities.

• Tax-exempt 501(c)(3) nonprofits, including qualifying hospitals and charitable organizations.

• Churches and eligible church-related organizations.

Certain ministers, including qualifying self-employed ministers and chaplains, can also participate.

Types of 403(b) accounts

The IRS recognizes three types of 403(b) arrangements:

1. 403(b)(1) annuity contracts: Insurance companies provide these contracts, which may offer investment or retirement income options.

2. 403(b)(7) custodial accounts: These accounts hold mutual fund investments.

3. 403(b)(9) retirement income accounts: Churches and qualifying church-related organizations establish these accounts, which can hold annuities or mutual funds.

The universal availability rule

The universal availability rule generally requires employers offering a 403(b) plan to let all employees make salary deferrals, subject to certain exclusions. These may include qualifying students, non-resident aliens, and some part-time employees.

SECURE 2.0 expanded eligibility for long-term part-time employees in ERISA-covered 403(b) plans. Starting in 2025, qualifying employees who complete two consecutive years with at least 500 hours of service annually may become eligible to participate, subject to applicable rules.

Can nonprofits choose a 401(k) instead?

Yes. Eligible tax-exempt nonprofits can offer a 401(k), a 403(b), or both.

A nonprofit may choose a 403(b) for its universal availability rules and permitted investment arrangements. Others may prefer a 401(k) for its plan design and investment flexibility.

Employers should compare administrative requirements, testing obligations, fees, and employee needs before deciding.

Public schools and most government employers generally cannot establish new 401(k) plans, although limited exceptions exist.

Contribution limits for 401(k) and 403(b) in 2026

The IRS sets the same annual employee contribution limits for 401(k) and 403(b) plans. However, age-based catch-up contributions and a special provision for certain long-serving 403(b) employees can increase how much eligible participants save.

Employee contribution limits

For 2026, employees can contribute up to $24,500 to either plan. This limit applies to traditional pre-tax and Roth contributions combined.

The annual Section 415 limit, which includes employee and employer contributions, is $72,000 or 100% of eligible compensation, whichever is lower. Eligible catch-up contributions generally fall outside this limit.

Age 50+ and age 60–63 catch-up

Employees aged 50 and older can contribute additional amounts if their retirement plan permits catch-up contributions.

• Ages 50–59 and 64+: An additional $8,000, bringing the maximum employee contribution to $32,500.

• Ages 60–63: An additional $11,250 under SECURE 2.0, bringing the maximum to $35,750.

The higher catch-up replaces the standard $8,000 catch-up rather than adding to it.

Starting in 2026, employees whose prior-year FICA wages from the plan sponsor exceeded $150,000 must generally make catch-up contributions on a Roth basis, subject to applicable rules.

How the 403(b) 15-year catch-up works

Certain employees with at least 15 years of service at the same qualifying organization may contribute additional amounts if their 403(b) plan permits it.

Eligible organizations include public schools, hospitals, churches, and qualifying health and welfare agencies.

The additional contribution equals the smallest of three amounts:

1. $3,000 annually.

2. $15,000 minus previous contributions made under the special 15-year rule.

3. $5,000 multiplied by years of service, minus earlier elective deferrals with that employer.

Example: An employee has completed 15 years of service, previously contributed $60,000 in elective deferrals, and used $4,000 of the special catch-up.

• Annual maximum: $3,000

• Remaining lifetime allowance: $15,000 − $4,000 = $11,000

• Service-based amount: ($5,000 × 15) − $60,000 = $15,000

The employee qualifies for an additional $3,000, the smallest amount. Employees eligible for both catch-up provisions must apply the 15-year catch-up first, followed by the age-based catch-up.

Can you contribute to both a 401(k) and a 403(b)?

Yes. Employees working for two employers may contribute to both plans, but their combined regular elective deferrals cannot exceed $24,500 in 2026, excluding permitted catch-up contributions.

Employer contributions generally follow separate annual addition limits for unrelated employers, although special aggregation rules may apply.

If combined employee deferrals exceed the permitted limit, employees should notify their plan administrators and arrange a corrective distribution, including attributable earnings, by April 15, 2027, for excess 2026 deferrals.

Investment options and fees

Investment options and fees are important factors when comparing 401(k) and 403(b) plans. Both allow employees to invest for retirement, but the products available and their associated costs depend on the employer’s plan.

401(k) investment options

Most 401(k) plans offer a selection of investments chosen by the employer or plan administrator. Common options include:

• Mutual funds: Pool money from investors to purchase stocks, bonds, or other securities.

• Target-date funds: Adjust their investment mix as the selected retirement date approaches.

• Collective investment trusts (CITs): Pooled investment funds managed by banks or trust companies.

• Company stock: Some employers allow employees to invest in their own company’s shares.

The available choices depend on the plan. Employees can review their investment menu and associated expenses before selecting funds.

403(b) investment options and annuities

Most 403(b) plans generally offer two main investment arrangements:

• Annuity contracts: Insurance company products that may provide investment growth or retirement income payments.

• Mutual fund custodial accounts: Accounts that invest retirement savings in mutual funds.

Church retirement income accounts have separate rules.

Annuities remain common because 403(b) plans originated as tax-sheltered annuity arrangements. Insurance companies historically served schools and nonprofit employers through these retirement products.

However, annuities may carry insurance charges, administrative fees, and surrender charges for early withdrawals or transfers. These costs depend on the contract.

Which plan usually costs more?

A 403(b) plan with annuity investments may cost more than a 401(k) offering low-cost mutual funds. However, the plan type alone does not determine fees.

To compare costs, employees should review:

• Investment expense ratios and management fees.

• Administrative and account maintenance charges.

• Annuity surrender charges and insurance-related fees.

For ERISA-covered plans, the participant fee disclosure provides investment costs and other plan charges. Employees in other plans can request fee information from their provider or review their annuity contracts and fund prospectuses.

The Department of Labor’s fee guidance explains how these charges affect retirement savings.

When assessing 403b vs 401k, which is better depends partly on the available investments, their fees, and the employee’s retirement needs.

ERISA, testing, and compliance differences

ERISA coverage and non-discrimination testing are major differences between 401(k) and 403(b) retirement plans. These rules determine how employers manage retirement benefits, protect participants, and demonstrate compliance with federal requirements.

What ERISA protection means

The Employee Retirement Income Security Act (ERISA) sets federal standards for private-sector retirement plans. Most private-sector 401(k) plans fall under ERISA, while coverage varies among 403(b) plans.

ERISA-covered plans must meet requirements involving:

• Fiduciary duties: Plan managers must act in participants’ interests and follow applicable fiduciary standards.

• Plan documentation: Employers must provide information about plan benefits, rules, and participant rights.

• Form 5500 reporting: Most covered plans must file an annual return with the Department of Labor.

• Participant protections: Employees receive rights to benefit information and procedures for claiming benefits.

Which 403(b) plans are exempt from ERISA?

Some 403(b) plans qualify for ERISA exemptions based on their sponsoring organization or operating structure.

These generally include:

• Governmental plans: Retirement plans sponsored by public schools and state universities.

• Church plans: Qualifying church retirement plans, unless the employer elects ERISA coverage.

• Voluntary 403(b) arrangements: Plans where employees participate voluntarily and employers maintain limited administrative involvement.

ERISA-covered 403(b) plans generally must file Form 5500, while qualifying exempt arrangements do not have that ERISA filing obligation.

Creditor protection

Both 401(k) and 403(b) retirement savings generally qualify for federal bankruptcy protection when they meet applicable tax requirements.

Outside bankruptcy, ERISA-covered plans receive strong federal protection against most creditor claims, subject to legal exceptions.

Non-ERISA 403(b) plans do not receive the same ERISA protections. Their protection against creditors outside bankruptcy depends on applicable state laws and other legal provisions.

Non-discrimination testing

Non-discrimination testing helps ensure retirement plans do not disproportionately benefit highly compensated employees (HCEs) over other employees.

Traditional 401(k) plans generally undergo two tests:

• ADP test: Compares employee salary deferral rates.

• ACP test: Compares employer matching and certain employee contribution rates.

Employers can use qualifying safe harbor 401(k) designs to satisfy applicable testing requirements.

403(b) plans follow different rules. Employee salary deferrals generally follow the universal availability rule instead of ADP testing, which requires employers to offer eligible employees the opportunity to contribute.

However, employer matching contributions in nongovernmental, nonchurch 403(b) plans may still require ACP testing and other non-discrimination checks.

403(b) plans are exempt from top-heavy testing rules, while governmental and qualifying church plans receive broader testing exemptions.

Employer matching and vesting

Both 401(k) and 403(b) plans allow employer contributions, but matching and vesting rules vary by plan.

Employer matching means the employer contributes based on employee savings. For example, a 50% match on contributions up to 6% of salary gives employees an additional 3% from their employer.

Vesting determines when employees fully own employer contributions. Employees always own their contributions, but employer contributions may require a period of service.

Employers can also contribute without requiring employees to save. Employer contributions are generally tax-deferred, although some plans may allow them to be made on a Roth basis.

How vesting works in both plans

Common schedules include:

• Immediate vesting: Employees own employer contributions as soon as they receive them.

• Cliff vesting: Employees become fully vested after a specified period, generally no longer than three years under standard private-sector defined-contribution rules.

• Graded vesting: Ownership increases gradually, reaching 100% after no more than six years under those rules.

Certain safe harbor 401(k) contributions require immediate or faster vesting. Governmental and qualifying church plans may follow different requirements.

Some nonprofit and public-sector employers offer retirement plans without matching contributions or provide separate pension benefits.

Employees comparing a 401k vs 403b plan should check the matching formula, vesting schedule, and pension benefits in their employer’s plan documents.

Roth 401(k) vs Roth 403(b)

A Roth 401(k) allows after-tax contributions to an employer-sponsored retirement account. Similarly, a Roth 403(b) offers the same tax treatment through eligible 403(b) plans. Both let employees pay income tax upfront rather than during retirement.

• Traditional contributions: Come from pre-tax income, reducing current taxable income. Withdrawals are generally taxed in retirement.

• Roth contributions: Come from after-tax income. Qualified withdrawals in retirement are tax-free.

The IRS sets the same $24,500 employee contribution limit for 2026 across both plans. Traditional and Roth contributions share this limit, with additional catch-up contributions available to eligible employees.

In-plan Roth conversions

An in-plan Roth conversion allows employees to move eligible pre-tax savings into a Roth account within the same 401(k) or 403(b) plan.

Employees generally pay income tax on the converted amount, but future qualified withdrawals are tax-free.

Mega backdoor Roth contributions

A mega backdoor Roth lets employees convert additional after-tax contributions into Roth savings, provided their plan allows after-tax contributions and Roth conversions or rollovers.

Since 2024, Roth 401(k) and 403(b) accounts are also exempt from lifetime RMDs. Unlike employer-sponsored plans, IRAs have separate contribution limits and generally offer greater investment flexibility.

Withdrawals, loans, and RMDs

Both 401(k) and 403(b) plans follow similar rules for withdrawing retirement savings, borrowing against account balances, and taking required minimum distributions (RMDs).

Early withdrawals and exceptions

Withdrawals before age 59½ generally trigger income tax and an additional 10% early withdrawal tax, unless an exception applies.

The age-55 separation rule allows qualifying employees who leave their jobs during or after the year they turn 55 to avoid this additional tax on eligible plan distributions.

SECURE 2.0 also introduced exceptions for qualifying circumstances:

• Emergency expenses: Up to $1,000 for eligible personal or family emergencies.

• Domestic abuse: Up to the inflation-adjusted statutory limit or 50% of the vested balance, whichever is lower.

• Terminal illness: Qualifying distributions can avoid the additional 10% tax.

These exceptions have specific eligibility requirements, and plan availability may vary.

Hardship withdrawals

Both plans may permit hardship withdrawals for immediate and heavy financial needs, including medical expenses, certain educational costs, and preventing eviction or foreclosure.

SECURE 2.0 expanded permitted 403(b) hardship distribution sources beginning in 2024. Plans may now allow withdrawals of certain contribution earnings, including earnings on elective deferrals, where permitted.

Hardship withdrawals generally cannot be repaid and may trigger income taxes and early withdrawal penalties.

Plan loans

If permitted, employees can generally borrow up to 50% of their vested account balance or $50,000, whichever is lower.

Plans may allow a $10,000 minimum borrowing exception for smaller balances. Loans generally require repayment within five years, although principal-residence loans can qualify for longer repayment periods.

Required minimum distributions

Traditional 401(k) and 403(b) accounts generally require RMDs starting at age 73, or age 75 for employees born in 1960 or later. Eligible employees may delay distributions until retirement.

A special 403(b) exception allows separately tracked pre-1987 contributions, excluding earnings, to remain undistributed until age 75 or a later qualifying retirement deadline.

Roth 401(k) and Roth 403(b) accounts do not require RMDs during the owner’s lifetime.

What happens to your 401(k) or 403(b) when you change jobs?

When you change jobs, you can generally keep your vested retirement savings or roll them over into another eligible retirement account. Your options depend on your plan’s rules, account balance, and your new employer’s retirement benefits.

Your options when you leave

1. Keep your savings in the existing plan: If permitted, leave your money invested.

2. Roll it into an IRA: Transfer eligible funds to a traditional or Roth IRA. Pre-tax funds transferred to a Roth IRA are generally taxable.

3. Transfer it to your new employer’s plan: Roll over savings if the plan accepts transfers.

4. Cash out: Withdraw your balance, subject to income taxes and a possible 10% early withdrawal tax.

Small balances may be subject to mandatory distribution or transfer rules.

Rolling a 401(k) into a 403(b) (and back)

Employees moving between private companies, schools, and nonprofit organizations can generally roll eligible 401(k) savings into a 403(b), or vice versa.

However, the receiving plan must accept rollovers.

A direct rollover transfers funds between retirement accounts without mandatory federal income tax withholding.

If employees receive a taxable eligible rollover distribution directly, the plan generally withholds 20% for federal income taxes. Employees typically have 60 days to complete an indirect rollover.

Before transferring savings, compare:

• Investment options: Does the new plan offer suitable funds or annuities?

• Fees: Are investment and administrative charges lower?

• Plan features: Are loans, withdrawal rules, and beneficiary options different?

Employees switching between private and nonprofit jobs should also review employer matching, vesting, and any annuity surrender charges before consolidating their retirement accounts.

SECURE 2.0 changes for 401(k) and 403(b) plans

The SECURE 2.0 Act introduced several changes to employer-sponsored retirement plans, with key provisions taking effect between 2024 and 2027.

Key changes include:

• Higher catch-up contributions (2025): Employees aged 60–63 can contribute an additional $11,250 in 2026.

• Roth catch-up contributions (2026): Employees whose 2025 FICA wages from their employer exceeded $150,000 must generally make catch-up contributions on a Roth basis.

• Automatic enrollment (2025): Most newly established 401(k) and 403(b) plans must automatically enroll eligible employees.

• Student loan matching (2024): Employers can match qualifying student loan payments.

• Saver’s Match (2027): Eligible savers can receive up to $1,000 annually in federal matching contributions.

Employers should review their plans to determine which provisions apply.

Managing 401(k) and 403(b) deductions with HR software

Managing retirement contributions requires accurate payroll calculations, especially when employees have different contribution rates, employer matching arrangements, and catch-up eligibility.

HR and payroll teams need to track several details:

• Payroll deductions: Calculate pre-tax and Roth contributions accurately during each pay cycle.

• Contribution limits: Monitor annual employee deferrals and applicable catch-up limits to identify potential excess contributions.

• Employer matching: Calculate employer contributions based on the plan’s matching formula.

• Records and reporting: Keep payroll deductions, contribution records, and retirement plan provider information aligned.

Manual tracking can increase the risk of missed deductions, incorrect contribution amounts, and reconciliation errors.

Keka’s payroll and benefits software helps US employers manage benefit deductions and employer contributions within payroll. It also supports 401(k) deduction accuracy and contribution limit validation.

By connecting benefits administration with payroll, employers can reduce manual updates and maintain more consistent retirement contribution records across pay cycles.

Choosing the right retirement plan for your needs

When evaluating retirement benefits, employees should compare employer matching, vesting schedules, investment options, fees, and catch-up provisions. These factors can influence long-term retirement savings and help employees assess job offers.

For employers, accurate retirement deductions are equally important. Managing contribution limits, payroll calculations, and employer contributions requires consistent records across HR and payroll.

Keka’s US payroll and benefits software helps employers manage retirement deductions alongside other employee benefits. Explore how Keka supports payroll and benefits administration, or request a demo to learn more.

FAQs

What are the disadvantages of a 403(b)?

A 403(b) may offer fewer investment choices than a 401(k), and some annuity products carry higher fees or surrender charges. Certain 403(b) plans also lack ERISA protections or employer matching contributions, depending on the sponsoring organization and plan structure.

Can I have both a 401(k) and a 403(b)?

Yes. Employees working for two employers can contribute to a 401(k) and a 403(b), but regular employee contributions across both plans share a combined limit of $24,500 in 2026, excluding eligible catch-ups. Employer contributions generally follow separate limits for unrelated employers, subject to applicable aggregation rules.

What happens to my 403(b) if I quit?

You can generally leave your vested savings in the existing plan, roll them into an IRA, or transfer them to a new employer’s eligible retirement plan if it accepts rollovers. Cashing out is another option, but it may trigger income taxes and an additional 10% early withdrawal tax.

Should I roll over my 401(k) into my 403(b)?

Consider a rollover if your new 403(b) accepts transfers and offers suitable investments, competitive fees, and useful plan benefits. Compare these features with your existing 401(k) and an IRA before deciding, and consider a direct rollover to avoid mandatory withholding.

How does the 403(b) 15-year catch-up work?

Employees with at least 15 years of qualifying service at the same eligible employer may contribute additional amounts if their plan allows it. The annual increase equals the smallest of $3,000, the unused portion of the $15,000 lifetime allowance, or $5,000 multiplied by years of service minus earlier elective deferrals.

Why do 403(b) plans offer annuities?

403(b) plans originated as tax-sheltered annuity arrangements for schools and nonprofit organizations, which explains their historical relationship with insurance companies. These plans generally use insurance annuity contracts or mutual fund custodial accounts, while qualifying church retirement income accounts have additional investment options.