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 in order 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.

For 2020, the contribution limit is $19,500 ($19,000 for 2019). For those over 50, the catch-up contribution limit is $6,500 ($6,000 for 2019).

Those are the same limits that are 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.

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 pre-tax dollars, and the 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, from the employee’s viewpoint. The 403(b) has fewer administrative requirements as it was 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 common with 401(k) plans.

Nevertheless, some employees have access to both.

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

The 403(b) plan may also come with fewer investment options to consider. Those are choices that the employer makes.

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 when it comes to 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 a separation of service.

In either case, distributions are taxed at ordinary income rates. 

As noted above, an employee age 50 or above is permitted to contribute an extra $6,500 to either plan. The IRS calls that a “catch-up.” It’s intended to help an employee boost savings as their retirement date grows closer.

There’s another catch-up provision in the 403b plan that applies only to employees with at least 15 years of service, and then only 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.