Can I Have Both a 403(b) and a 401(k)?

If your employer offers both a 403(b) and a 401(k), you can contribute to both plans to boost your retirement savings. However, there are limits on the combined total of so-called salary reduction contributions you can make in a tax year.

The contribution limit is $20,500 for 2022, and $22,500 for 2023. For those age 50 and over, the catch-up contribution limit is $6,500, increasing to $7,500 for 2023. These are the same limits placed on contributions to either plan individually. So you are free to use both vehicles, but the caps on tax-deferred contributions remain the same.

403(b) and 401(k) Plans

The 403(b) plan is typically made available to employees of non-profits such as public schools, tax-exempt organizations, and religious groups. Contributions are made in pretax dollars, and deductions are made directly from the employee's salary. The employer may match a portion of the employee's contribution. The employee chooses how to invest the money based on options offered by the employer.

If this sounds similar to a 401(k), it is—at least from the employee's viewpoint. The 403(b) has fewer administrative requirements designed for cash-strapped non-profits. In addition, a 403(b) is often administered by an insurance company rather than a mutual fund company, as is standard with 401(k) plans. Nevertheless, some employees have access to both.

A 401(k) offers more investment choices to employees. Initially, a 401(k) didn't offer annuity options. After passing the 2019 Setting Every Community Up for Retirement Enhancement (SECURE) Act, employers can include bonds, individual stocks, ETFs, and mutual funds in a 401(k) offering to their employees. A 403(b) only offers annuities and mutual funds. Overall a 401(k) offers more flexibility and choice regarding investments.

A 401(k) plan may generally have a more generous employer match. That's because big companies usually have more money to offer in benefits than nonprofit organizations, so it may not apply to a non-profit that offers both plans.

One Big Difference

There is one big difference between a 403(b) and a 401(k). For both plans, you must be at least 59½ to withdraw funds; otherwise, you'll need to pay a 10% early withdrawal penalty.

However, 403(b) participants enjoy a bit more leeway regarding exceptions to the early withdrawal penalty. For example, you can take a distribution if you have a severance from your employer. For 401(k) participants, you must be at least 55 to take a distribution following service separation. In either case, distributions are taxed at ordinary income rates.

One More Catch-Up

As noted above, an employee age 50 or above can contribute an extra $6,500 in 2022 and $7,500 in 2023 to either plan. The IRS calls that a catch-up. It's intended to help employees boost savings as their retirement date grows closer.

Another catch-up provision in the 403(b) plan applies only to employees with at least 15 years of service if the employer approves it. It's worth checking out this rule if it applies to you and you can afford the extra contribution from your salary.

According to the IRS, "If permitted by the 403(b) plan, an employee who has at least 15 years of service with the same eligible 403(b) employer—a public school system, hospital, home health service agency, health and welfare service agency, church, or convention or association of churches (or associated organization), has a 403(b) elective deferral limit that is increased by the lesser of:

1. $3,000,
    
2. $15,000, reduced by the amount of additional elective deferrals made in prior years because of this rule, or
    
3. $5,000 times the number of the employee’s years of service for the organization, minus the total elective deferrals made for earlier years.

An employee who qualifies for the 15-year rule can have an elective deferral limit as high as $22,500 for 2020 and 2021."

Special Considerations

The differences between 401(k) and 403(b) plans, both of which offer qualified tax-advantaged retirement plans, differ from who offers them to how you can invest within them.

For-profit companies offer 401(k) plans to their employees, and 403(b) plans are financial vehicles used by those working in universities, schools, government, and non-profit organizations. If your employer offers both types of plans, you may invest in both types. A 403(b) plan is exempt from nondiscrimination testing but not a 401(k).

From a legal standpoint, 403(b) plans do not have to comply with all of the Employee Retirement Income Security Act (ERISA) regulations, which govern qualified, tax-deferred retirement investments. 403(b) plans do not have to meet all regulations due to a U.S. Department of Labor regulation, which cites that 403(b) plans are not technically labeled as employer-sponsored if the employer doesn't make contributions to the accounts. However, many employers do fund contributions, making them the same ERISA guidelines and standard reporting requirements as the employers offering 401(k) plans.

At one point, 401(k) accounts did not offer annuities, while they were standard offerings in 403(b) accounts. After the passage of the SECURE Act, annuities may become more commonplace as 401(k) offerings, partly because annuity plans now offered in a 401(k) can travel with the employee, i.e., portable. The annuities can be transferred to another retirement plan or an IRA account.

The Bottom Line

If your employer offers both a 401(k) and a 403(b), you can contribute to both plans, but there are limits on how much you can contribute with your pre-tax dollars. While the contribution limit can be as high as $27,000 in 2022 if you are age 50 or older ($30,000 in 2023), you can invest up to the cap on the distributions across all accounts.

If you only have one account, you can still invest your pre-tax dollars and take advantage of employer-matching funds. The more you save towards retirement, the better off you will be financially when you step away from your job.