By: Lim Chan

June 7, 2025

I want to take a moment to congratulate all the recent graduates! I hope all of you have found a good position in your field of study! As newly minted professionals enter the workforce, they may encounter the option to contribute to either a 401(k) or a 403(b). Let’s explore what these plans are and the benefits they provide.

Difference Between 401(k) and 403(b)

401(k) and 403(b) plans are very similar, but there are key differences between them. A 401(k) plan is offered by for-profit companies, while a 403(b) plan is strictly available to government and non-profit employees. Another notable difference is that 403(b) plans have a more limited range of investment options due to federal regulations, which restrict investments to annuities and mutual funds only.

Now that we’ve covered the key differences, let’s focus on the traditional 401(k), what it is, and how it works.

What Is a Traditional 401(k) and How Does It Work?

A traditional 401(k) is an employer-sponsored retirement plan, funded by deductions from an employee’s paycheck. Some employers also match contributions, providing additional funds to boost employees’ retirement savings.

In simple terms, a 401(k) allows an employee to invest money and grow it tax-free over time. Employees choose how much to contribute, up to the maximum amount allowed by the government. The employer then withholds the agreed contribution from each paycheck and deposits it into the 401(k) account. In most cases, employers match contributions up to a certain percentage.

The contributed funds can be invested in various assets, including mutual funds, target-date funds, index funds, money market funds, exchange-traded funds (ETFs), bonds, and stocks, all chosen by the employee based on their risk tolerance.

What Are the Benefits of a 401(k)?

1. Tax Advantages

Contributions to a traditional 401(k) plan are deducted from an employee’s paycheck before taxes. Because these contributions are pre-tax, they reduce the employee’s taxable income, which lowers the amount of income tax owed. This can be especially beneficial for employees who are on the cusp of a higher tax bracket, potentially keeping them in a lower bracket.

2. Employer Match

To encourage employees to save for retirement, many employers offer a 401(k) match, meaning they contribute a certain percentage based on the employee’s contributions. Some employers even use conditional matching to encourage employees even more.

For example, let’s compare Samsung USA with an imaginary company that offers a 100% match up to 4.5%:

Samsung USA’s matching structure:

100% match on the first 3% of employee contributions

50% match on the next 3% of employee contributions

Maximum employer match: 4.5%

Imaginary company’s matching structure:

100% match up to 4.5% of employee contributions

Let’s calculate how this works for an employee earning $8,000 per month ($96,000 annually):

Samsung USA Example:

Employee contribution:

$96,000 × 6% = $5,760

Employer contribution:

$96,000 × 3% + ($96,000 × 3% × 50%) = $2,880 + $1,440 = $4,320

Imaginary Company Example:

Employee contribution:

$96,000 × 4.5% = $4,320

Employer contribution:

$96,000 × 4.5% = $4,320

Since the Samsung employee wanted to take full advantage of the company match, they contributed 6% of their salary to the 401(k) plan. Meanwhile, the Imaginary Company employee only needed to contribute 4.5% to maximize the company match, so they contributed 4.5% of their salary to the 401(k) plan.

As shown above, conditional matching encourages employees to contribute more and save more toward their retirement. In most cases, employees tend to contribute up to the maximum company match to make the most of their employer’s contributions.

What are the Concerns of a 401(k)?

1. Contribution Limits

401(k) plans are subject to contribution limits. For 2025, the maximum contribution is $23,500 for individuals under 50 and $31,000 for those 50 and older. Exceeding these limits can lead to penalties and tax complications.

2. Limited Investment Options

Employers select the 401(k) plan provider, and employees can only invest in the options offered by that provider, which may limit their investment choices.

3. Vesting schedule

Employee contributions to a 401(k) are always 100% vested, but employer contributions may follow a vesting schedule. For example, employer contributions might become 100% vested after a certain period, such as two or three years, or they could vest gradually over time, such as 20% per year until fully vested. If an employee leaves before the employer contributions are fully vested, the unvested portion may be forfeited.

4. Penalties on Early Withdrawals

401(k) plans are designed for retirement savings, so withdrawing funds before age 59.5 incurs a penalty. However, certain exceptions, such as disability or hardship withdrawals, allow participants to access funds without penalties.

5. Required Minimum Distributions (RMDs)

All pre-tax retirement accounts, including 401(k) plans, are subject to Required Minimum Distributions (RMDs). These mandatory withdrawals ensure that the IRS can collect taxes on untaxed assets. To minimize tax burdens, 401(k) participants should strategically plan their withdrawals each year.

Final thoughts

401(k) and 403(b) plans are both excellent vehicles for retirement savings. Many financial advisors often refer to employer matching contributions in these plans as “free money,” and many companies use their contribution levels to enhance employee benefits to attract potential hires. I hope this analysis helps potential participants determine whether a 401(k) or 403(b) plan is suitable for them.