Recently, I’ve been researching retirement savings plans in the United States and found that many people are not very clear about the differences between 401(k) and 403(b) plans. Actually, they are both employer-sponsored retirement accounts, but there are quite a few differences that are worth understanding.

First, let’s talk about the 401(k). It’s the most common retirement plan for profit-making companies. Employees can contribute a portion of their pre-tax wages into the account, and this money isn’t taxed until you withdraw it. Many companies also match your contributions, which is essentially free money. Investment options are also quite diverse, usually including various mutual funds and even company stocks.

The 403(b) plan is mainly for employees of public schools, non-profit organizations, and religious groups. It works similarly—contributions are made pre-tax, and the money is tax-deferred until withdrawal. However, the investment choices are somewhat more limited, historically mainly annuities and mutual funds. But recently, options have expanded.

Regarding contribution limits, 401(k) and 403(b) are actually the same. The standard limit for 2024 is $23,000 per year, with an additional catch-up contribution of $7,500 for those aged 50 and above. This is helpful for people approaching retirement age. But here’s an interesting point: 403(b) plans have a special rule—employees who have worked at the same organization for 15 years can contribute an extra $3,000 annually. Although there’s a lifetime cap, this rule provides long-term employees with more opportunities to catch up.

As for employer matching, 401(k) plans are more common in this regard. Most profit-making companies will match a portion of employees’ contributions—for example, if you contribute 6% of your salary, the company might match 50%. Employer matching in 403(b) plans is less common; some organizations offer non-elective contributions, meaning they contribute a certain amount regardless of whether you participate.

In terms of investment options, 401(k)s tend to be more flexible. You can invest in a variety of mutual funds, ETFs, and sometimes individual stocks. 403(b) plans historically had fewer choices, mainly annuities, but that has improved recently. Still, they tend to focus more on annuities.

Withdrawal rules are also important. Both plans impose a 10% penalty for early withdrawals before age 59½ unless under special circumstances like disability or financial hardship. Starting at age 73, you are required to take minimum distributions; failing to do so can result in hefty penalties from the IRS.

When comparing 401(k) and 403(b), the most practical advice is to look at the specific plan your company offers. Focus on a few key aspects: Are the fees high? Are the investment options sufficient? How generous is the employer match? If there’s an employer match, be sure to contribute enough to get the full match—that’s the most straightforward benefit.

Overall, both 401(k) and 403(b) are excellent tools for retirement savings. The key is to understand their differences, choose the right plan based on your situation, and consistently contribute. Retirement planning has no shortcuts—start early and let compound interest work for you.