A 403(b) plan is a tax-advantaged retirement plan for public school and non-profit employees. It’s similar to a 401(k), but has limited investment options.
This guide dives into IRS rules and contribution limits for 403(b) plans. Learn how a 403(b) can fit in your investment strategy.
What is a 403(b) retirement plan?
A 403(b) is a tax-advantaged retirement savings plan similar to a 401(k). 403(b)s are offered to employees of tax-exempt organizations including schools, non-profits, hospitals, and the public sector.
Contributions are deducted from your paycheck using pre-tax dollars. Earnings are tax-deferred meaning taxes aren’t collected until you begin making withdrawals in retirement.
How does a 403(b) plan work?
A 403(b) plan can be set up by a public institution or a 501(c)(3) tax-exempt organization. Workers eligible to enroll in an employer-sponsored 403(b) include:
- Public school teachers
- State university employees
- Librarians
- Hospital workers
- Firefighters
- Police officers
- Other non-profit workers
Employees can enroll in automatic payroll deductions with their 403(b). Contributions are made using pre-tax dollars (or after-tax if your employer allows you to set up a Roth 403(b).
Employers may offer matching contributions as part of your compensation package.
Standard withdrawals are taxed as regular income and can be made penalty-free once you reach age 59½. Early withdrawals can be made before then but will incur a 10% penalty unless you qualify for an exception.
If you leave your employer at age 55, you can withdraw from that employer’s 403(b) without penalties. You can also rollover your savings to a new employer’s 401(k) or a traditional IRA.
For medical emergencies, you can also take penalty-free withdrawals if unreimbursed medical expenses exceed 7.5% of your adjusted gross income.
403(b) plans require minimum distributions beginning at age 72 or 73, depending on when you were born.
In 2024, Roth 403(b) plans which use after-tax dollars will no longer require RMDs unless the account holder has died.
Here’s an example of how a 403(b) plan works. Joe is a 45-year-old public school teacher who makes $50,000 a year. He contributes to a traditional 403(b) through regular payroll deductions.
Similar to a 401(k), his savings grow tax free. Joe is in the 22% tax bracket so when he retires at age 65 his withdrawals will be taxed as regular income. If he decides to retire early, he can do so and begin withdrawing from his 403(b) at age 55.
403(b) Contribution Limits
A 403(b) allows you to save for retirement using pre-tax dollars which means there are caps on annual contribution limits.
Some employers may offer matching contributions and individuals who work for the same organization for 15 years or longer are able to make extra contributions.
403(b) 2025 Contribution Limits
Contribution Type | Contribution Limit |
---|---|
Individuals | $23,000 |
Catch-up (age 50 or older) | $30,500 |
Total combined employee and employer | $69,000 |
Bonus catch-up for 15+ years of service | $3,000 per year up to $15,000 |
Types of 403(b) Plans
- Traditional 403(b): Similar to a 401(k) contributions are made with pre-tax money. This can lower your taxable income for the year but you’ll pay ordinary taxes when you begin taking withdrawals in retirement.
- Roth 403(b): Contributions to a Roth 403(b) are made with after-tax money, providing no immediate tax advantage. Withdrawals made from a Roth 403(b) are tax-free. Not all employers that offer 403(b) plans offer the Roth 403(b) option.
- 403(b)(9) Plan: This is a special plan specifically designed for employees of religious institutions, allowing clergy to participate in a retirement savings plan similar to other 403(b) options.
Advantages & Disadvantages
A 403(b) plan is a good way to save for retirement if your employer sponsors a plan but there are some things you’ll want to take into consideration when you enroll in one.
Advantages
- Tax-deferred growth: a traditional plan allows you to grow your investments without paying taxes until you make a withdrawal. Roth accounts allow you to generate returns where you won’t pay taxes on your withdrawals.
- Shorter vesting periods: Many 403(b) plans have shorter vesting periods than 401(k) plans, giving you full ownership of employer contributions faster than in other retirement plans.
- Additional catch-up contributions: Employees with 15+ years of service at the same eligible employer may be able to make additional catch-up contributions of up to $3,000 per year, with a lifetime limit of $15,000, even if you are not yet 50 years old.
- Flexible contribution options: where it’s an option, you can choose between making contributions to a traditional 403(b) plan or a Roth plan giving you more flexibility than other retirement savings plans.
Disadvantages
- Limited investment options: 403(b) plans often have fewer investment choices compared to other retirement plans like 401(k)s. Investments are typically limited to fixed and variable annuity contracts and mutual funds, while 401(k)s or IRAs may include securities like stocks, bonds, and REITs.
- Early withdrawal penalty: Withdrawals made before age 59½ are subject to a 10% tax penalty, unless you qualify for an exception.
- Potential lack of creditor protection: Some 403(b) accounts may lack the creditor protection provided by other retirement plans, making them more vulnerable in legal situations.
Is a 403(b) plan a tax-sheltered annuity?
A 403(b) plan can also be referred to as a tax-sheltered annuity.
Contributions made to a traditional 403(b) plan are made using pre-tax dollars from your paycheck.
This means they’re not subject to federal or state income tax until you begin making withdrawals in retirement.
403(b) vs. 401(k)
A 403(b) is similar to 401(k) by allowing public sector and non-profit workers to save for retirement.
403(b)s come with opportunities to save more over the course of your career and are administered as tax-sheltered annuities.
Criteria | 403(b) | 401(k) |
---|---|---|
Who Can Contribute | Eligible public sector and non-profit employees | Private sector employees |
Contribution Limit | $23,000 ($30,500 over age 50) Bonus $15,000 catch-up for individuals with 15+ years of service | $23,000 ($30,500 over age 50) |
Contribution Type | Pre-Tax (After tax for Roth) | Pre-Tax |
Withdrawals | Withdrawals are taxed as ordinary income and a 10% penalty applies for distributions taken before age 59 ½. | Withdrawals are taxed as ordinary income and a 10% penalty applies for distributions taken before age 59 ½. |
Assets You Can Invest In | Annuities and mutual funds | Stocks, bonds, mutual funds, and exchange-traded funds |
403(b) vs. 457(b)
A 457(b) plan is similar to a 403(b) but applies to a smaller group of public sector workers, usually those working in state and local government.
Unlike most retirement savings plans, a 457(b) allows you to make penalty-free withdrawals when you leave your employer.
Criteria | 403(b) | 457(b) |
---|---|---|
Who Can Contribute | Eligible public sector and non-profit employees | Eligible state and local government employees |
Contribution Limit | $23,000 ($30,500 over age 50) Bonus $15,000 catch-up for individuals with 15+ years of service | $23,000 ($30,500 over age 50) |
Contribution Type | Pre-Tax (After tax for Roth) | Pre-Tax (After tax for Roth) |
Withdrawals | Withdrawals are taxed as ordinary income and a 10% penalty applies for distributions taken before age 59 ½. | Withdrawals can be taken penalty-free at any age when you leave an employer sponsoring a 457(b), however, withdrawals are still taxed as ordinary income. |
Assets You Can Invest In | Annuities and mutual funds | Annuities and mutual funds |
How to Set Up a 403(b) Plan
To set up a 403(b) plan you’ll first need to fill out an application. This is typically provided by the plan’s sponsor.
On the application you’ll need to provide your:
- Name
- Mailing Address
- Phone Number
- Social Security Number
- Investment Elections
- Beneficiary Information
After your application is submitted, your plan administrator will give you access to your account. This will allow you to manage your account at your discretion.
Once your account is officially open, you can begin contributing to it. Because 403(b) contributions use pre-tax dollars, work with your human resources department to set up automatic payroll deductions.
Should you invest in a 403(b)?
For eligible employees, this can be an easy way to jump start saving for retirement. If you plan to stay with your employer throughout your career, the bonus contribution can help you grow your retirement savings.
That being said, a 403(b) isn’t for everyone. You are limited in what you can invest in which can reduce the growth potential of your portfolio over time.
The good news is you can contribute to both an IRA and a 403(b) simultaneously. Evaluate your goals and your total compensation package to determine if investing in a 403(b) is right for you.
FAQs
Can you withdraw from a 403(b)?
Yes, you can withdraw from a 403(b). Withdrawals made after age 59 ½ are taxed as regular income while withdrawals made before then incur an extra 10% penalty.
Under the Rule of 55, if you leave your employer you can begin making penalty-free withdrawals beginning at age 55.
How much can you contribute to a 403(b)?
In 2024, the maximum an employee can contribute to a 403(b) plan is $23,000. Employees aged 50 or older can contribute up to $30,500 and individuals with 15 years of service or more to an organization can contribute an extra $3,000 per year up to $15,000 during their lifetime.
What happens to a 403(b) when you quit your job?
If you quit your job you can leave your 403(b) with your previous employer, transfer it to a new employer’s retirement plan, or roll it over into an IRA.
You can also cash it out but if you do that you will incur taxes and penalties.
When is the money in a 403(b) plan taxed?
The money in a 403(b) plan is taxed when you begin taking withdrawals in retirement unless you contribute after-tax dollars into a Roth plan. Withdrawals are taxed as ordinary income.