403(b) & 457

Do teachers have a 401k or 403b?

If you are a public or private school teacher, you may wonder whether teachers have a 401(k) or 403(b). Here is everything you need to know.

3 min read

Teachers have a mix of various potential sources of income. While state pension is often the primary source of retirement income for most teachers, it may not be enough to cover all retirement expenses. However, most teachers have access to a defined contribution plan.

Teachers may have access to a 401(k) or 403(b) retirement plan. A 403(b) retirement plan is offered to teachers working in public schools, while 401(k) is offered to teachers working in tax-exempt and for-profit private schools. If your employer offers both 401(k) and 403(b), you may choose to contribute to either or both plans depending on the plan rules.

Is a 401(k) or 403(b) Better for a Teacher?

Both 401(k) and 403(b) offer great benefits to teachers, and they allow participants to contribute pre-tax dollars for their retirement. The money grows tax-deferred, and you will only owe taxes when you make a withdrawal, usually in retirement. You must be at least 59 ½ to make penalty-free withdrawals.

If your school offers both 401(k) and 403(b), you should weigh the pros and cons of each retirement plan. You should consider the investment choice provided in each plan, the special catch-up contribution for 403(b), and the employer’s match. Depending on the plan rules, you can choose one over the other, or contribute to both plans.

If you decide to contribute to both plans, you can make contributions to 401(k) and 403(b) at the same time in the same year. However, the total contributions to both retirement plans cannot exceed the annual contribution limit. For 2022, the contribution limit is $20,500, or $27,000 if you are 50 or older.

What is a 401(k)?

A 401(k) retirement plan is a tax-advantaged retirement plan that allows employees to stash away part of their salary for their retirement. It is funded with pre-tax contributions, meaning you do not pay taxes on the contributions you make to the 401(k) plan, which helps lower your taxable income for the year.

The 401(k) contributions are allocated to various types of investments to earn a profit. Typically, the employer selects a list of investment options that will be available to 401(k) plan participants. Some of these investment options may include stocks, bonds, and mutual funds.

What is a 403(b)?

A 403(b) retirement plan is available to employees of public schools, hospitals, and other non-profit organizations. Some participants who may be eligible to enroll in a 403(b) include teachers, nurses, librarians, and university professors.

Public schools offering 403(b) plans to teachers are required to follow the "Universal Availability Rule" to maintain the plan's tax-exempt status. To comply with this rule, schools must offer the 403(b) plan to all eligible employees to defer part of their paycheck to the retirement plan. However, exemptions to this rule include employees participating in another qualified plan like 401(k) or 457 plan and employees working less than 20 hours per week.

401(k) vs. 403(b) Similarities

401(k) and 403(b) plans have a lot in common. Here are some of the key similarities:

Tax-advantaged status

Both 401(k) and 403(b) are tax-advantaged plans, meaning that participants do not pay taxes on the contributions or investment earnings until the funds are withdrawn. For Roth options, participants pay taxes on contributions, but won’t pay taxes on qualified withdrawals.

Contribution limits

The elective contribution limits are the same for 401(k) and 403(b). For 2022, you can contribute up to $20,500 to each retirement plan. However, if your employer allows participants to contribute to both plans at the same time, the annual contribution limit applies to the cumulative contributions to both retirement plans.

Catch-up contributions

If you are above 50, or you will be 50 by the end of the year, you can contribute an additional $6,500 in catch-up contribution in 2022. Whether you contribute to one or both plans, the annual catch-up contribution limit remains the same.

401(k) vs. 403(b) Differences

Though 401(k) and 403(k) are similar in various ways, there are some distinctions between these retirement plans. Here are key differences between 401(k) and 403(b):  

Investment options

Both 401(k) and 403(b) have a limited selection of investment options, but a 401(k) has more investment choices than a 403(b). 401(k) plans offer stocks, bonds, and mutual funds while 403(b) plans only offer mutual funds and annuities.

Non-discrimination testing

While 401(k) plans are subject to nondiscrimination testing for elective deferrals, 403(b) plans are exempt from these tests. This allows highly compensated employees (HCE) to maximize their elective deferrals to 403(b) plans. However, employer contributions must be fair for all employees, and they should demonstrate that the match does not favor HCEs.

Special catch-up

403(b) plans allow employees with 15 or more years of service with the same employer to contribute an additional $3,000 each year, with a lifetime limit of $15,000. You may be eligible to make the special catch-up contribution even if you are not yet 50. However, 401(k) plans do not have this type of catch-up contribution.