A 403(b) plan is a tax-advantaged retirement savings plan available to employees of public schools, non-profit organizations, and religious institutions.
How Does a 403(b) Plan Work?
A 403(b) allows eligible employees to contribute pre-tax salary dollars, reducing current taxable income. Your money grows tax-deferred until withdrawal, typically during retirement when you may be in a lower tax bracket. Also called a Tax-Sheltered Annuity (TSA) plan, it operates similarly to a 401(k) but serves educators, healthcare workers, and non-profit employees.
Key Features of a 403(b):
- Pre-tax contributions: Contributions are usually made with pre-tax dollars, reducing taxable income in the year you contribute. Some plans also offer a Roth 403(b) option for after-tax contributions.
- Tax-deferred growth: Investments grow tax-deferred, so you don’t pay taxes on earnings until you withdraw funds.
- Withdrawal rules: Withdrawals before age 59½ may incur a 10% early withdrawal penalty, with exceptions for separation from service at age 55 or older, disability, certain medical expenses, or annuity distributions.
- Required Minimum Distributions (RMDs): Must start at age 73.
- Contribution limits (2025): Employees can contribute up to $23,500 per year, or $30,500 if age 50 or older (catch-up contribution). Some employees with 15+ years of service may qualify for an additional special catch-up contribution.
- Employer contributions: Many 403(b) plans include matching or discretionary contributions, which can significantly boost retirement savings.
- Investment options: Investment options are limited to those chosen by the employer
403(b) vs. 401(k): Key Differences
Eligible Employers
- 403(b): Schools, non-profits, and religious organizations
- 401(k): Most private companies
2025 Contribution Limit
- 403(b): $23,500 ($31,000 if age 50 or older)
- 401(k): $23,500 ($31,000 if age 50 or older)
Special Catch-Up
- 403(b): Offers a 15-year service catch-up contribution
- 401(k): No additional catch-up beyond the age 50 limit
Investment Options
- 403(b): Often limited to annuities and mutual funds
- 401(k): Broader range of investment options
ERISA Protection
- 403(b): Limited for church and government plans; some may be subject to ERISA
- 401(k): Generally has full ERISA protection
Who is Eligible for a 403(b)?
Qualifying Organizations
- Public schools (teachers, administrators, support staff)
- Non-profit organizations with 501(c)(3) status
- Religious organizations (churches, faith-based institutions)
- Public colleges and universities
- Certain nonprofit hospitals and healthcare organizations (must be 501(c)(3) organizations).
You're eligible regardless of full-time or part-time status, as long as you work for a qualifying employer and meet the plan’s participation rules.
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Get startedTypes of 403(b) Plans
Traditional 403(b)
- Pre-tax contributions: Traditional 403(b)s Reduce your taxable income in the year you contribute.
- Tax-deferred growth: Investments grow without current taxation.
- Taxable withdrawals: Withdrawals are taxed as ordinary income in retirement.
- RMDs: Required beginning at age 73, unless you’re still employed by the plan sponsor and not a 5% owner.
Roth 403(b)
- After-tax contributions: Funded with money you’ve already paid taxes on.
- Tax-free growth and qualified withdrawals: Earnings and withdrawals are tax-free if you’re at least 59½ and the account has been open at least five years.
- No RMDs (as of 2024): Roth 403(b)s no longer require distributions during the original owner’s lifetime.
- More common today: Most employers now include Roth options alongside Traditional 403(b)s.
Advantages of 403(b) Plans
Tax Benefits
- Traditional 403(b): Offers an upfront tax break on contributions.
- Roth 403(b): Provides tax-free income in retirement.
- All 403(b)s: Allow tax-deferred investment growth, avoiding annual taxes on earnings.
Special Features
- 15-year service catch-up: Eligible employees with 15+ years at the same organization may contribute up to $3,000 more per year, with a $15,000 lifetime limit.
- Age 50 catch-up: Workers age 50 and older can contribute an extra $7,500 annually (2025 limit).
- Employer contributions: Many organizations add matching or discretionary contributions.
- Simplified testing: Employee deferrals are generally exempt from nondiscrimination testing, though employer contributions may still be reviewed.
What Happens When You Change Jobs?
When you leave an employer, you have several options for your 403(b):
- Keep it with your former employer (if the plan allows)
- Roll it over to an IRA or a new employer’s 403(b)/401(k)
- Take a withdrawal (may risk the consequences of tax or penalties)
Many people choose to roll over their 403(b) to gain more investment options, lower fees, and consolidate multiple retirement accounts into one easy-to-manage account.
The Bottom Line
A 403(b) can be valuable for building retirement security, especially for educators and non-profit workers. While these plans have limitations compared to 401(k)s or IRAs, understanding features like the 15-year service catch-up and choosing low-fee investment options can help maximize your benefits.
The key to 403(b) success is understanding your options, minimizing fees, and ensuring it fits your overall retirement strategy. If you have old 403(b) accounts from previous employers, consolidating them into an IRA can provide a wider range of investment choices, potentially lower fees, and simpler account management.
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Information contained herein has been obtained from sources considered reliable, but its accuracy and completeness are not guaranteed. It is not intended as the primary basis for financial planning or investment decisions and should not be construed as advice meeting the particular investment needs of any investor. This material has been prepared for information purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results.
