A 403(b) is a retirement savings plan where your employer deducts money from your paycheck before taxes, invests it, and you withdraw it after age 59½

A 403(b) plan works like this: you choose how much to contribute from each paycheck, your employer sends that money to an insurance company or investment firm, the money grows tax-free while it sits there, and you can withdraw it starting at age 59½ without paying income tax on the growth. The money you contribute reduces your taxable income for the year, which lowers your tax bill when ready.

The plan is named after section 403(b) of the Internal Revenue Code. It is available only to employees of schools, hospitals, nonprofits, and some government agencies — not to people who work for regular for-profit companies. If your employer offers one, you decide whether to participate and how much of your salary to contribute each month.

Key Takeaways

  • You contribute pre-tax dollars from your paycheck, which lowers your taxable income for that year and reduces what you owe in federal income tax.
  • Your money is invested in annuities or mutual funds chosen by you or your plan, and grows tax-free until you withdraw it.
  • You can withdraw money penalty-free starting at age 59½, but withdrawals before that age usually trigger a 10 percent early withdrawal penalty plus income tax.
  • Your employer may match part of your contribution, which is information programs added to your account and counts toward your annual contribution limit.
  • The annual contribution limit for 2024 is $23,500, or $31,000 if you are age 50 or older, though some long-time employees may have higher limits.

How money moves into your 403(b) account

You fill out a form with your employer's benefits department stating how much of each paycheck you want to contribute — usually a dollar amount or a percentage of your salary. Your employer then deducts that amount before calculating your income tax, sends it to the investment provider your plan uses, and the money appears in your account within a few days.

This is called a pre-tax contribution because the money leaves your paycheck before federal income tax is withheld. If you earn $50,000 a year and contribute $6,000 to your 403(b), you only pay income tax on $44,000. The $6,000 is not taxed until you withdraw it years later.

Some plans also allow Roth contributions, where you contribute after-tax dollars instead. With Roth, you pay income tax on the contribution now, but the money and its growth come out tax-free later. You choose which type to use, or split your contribution between both.

What happens to your money while it grows

Once your contribution reaches the investment provider, you choose where it is invested. Most 403(b) plans offer annuities, mutual funds, or both. An annuity is a contract with an insurance company that guarantees a certain return or payment stream. A mutual fund is a pool of stocks or bonds managed by an investment company, and its value rises and falls with the market.

Your plan documents list the specific investment options available to you. You pick one or more, and your contributions are divided among them. The money grows tax-free — you do not pay income tax on the interest, dividends, or capital gains each year, only when you withdraw it.

Some employers offer a match, meaning they contribute a percentage of your salary to your account if you contribute too. For example, an employer might match 50 percent of what you contribute, up to 6 percent of your salary. If you earn $50,000 and contribute $3,000, your employer adds $1,500. That $1,500 is information programs and counts toward your annual contribution limit.

Contribution limits and catch-up contributions

The IRS sets an annual limit on how much you can contribute to a 403(b) in a single year. For 2024, the limit is $23,500. If you are age 50 or older, you can contribute an additional $7,500 in catch-up contributions, for a total of $31,000.

Some employees who have worked at the same employer for 15 years or longer may be able to contribute even more under a special rule called the 15-year catch-up. The amount varies, but it can add up to $3,000 per year, up to a lifetime total of $15,000. Your plan documents or benefits department can tell you whether this applies to you.

Your employer match does not reduce your personal contribution limit — it counts toward the overall limit, but separately. If your employer contributes $5,000 and you contribute $23,500, the total is $28,500, which is within the limit. However, if you and your employer together exceed the limit, the excess is returned to you or your employer depending on the plan rules.

When you can withdraw money and what happens if you withdraw early

You can withdraw money from your 403(b) penalty-free starting at age 59½. When you do, you pay ordinary income tax on the amount withdrawn, but no 10 percent early withdrawal penalty. If you contributed pre-tax dollars, you pay tax on the full withdrawal. If you contributed Roth dollars, you pay tax only on the growth, not the contribution itself.

If you withdraw money before age 59½, you owe both income tax and a 10 percent early withdrawal penalty on the amount taken out. For example, if you withdraw $10,000 at age 45, you pay income tax on the $10,000 plus $1,000 in penalty. There are narrow exceptions: withdrawals for disability, medical expenses that exceed 7.5 percent of your adjusted gross income, or a series of equal payments over your life expectancy do not trigger the penalty.

You must begin taking withdrawals by April 1 of the year after you turn 73. These are called required minimum distributions or RMDs. The IRS calculates the minimum amount based on your age and account balance, and you must withdraw at least that much each year or pay a penalty.

How a 403(b) differs from a 401(k) and an IRA

A 403(b) and a 401(k) work similarly — both are employer-sponsored plans where you contribute pre-tax dollars, the money grows tax-free, and you pay tax on withdrawals. The main differences are who offers them and the investment options. A 401(k) is offered by for-profit companies; a 403(b) is offered by nonprofits, schools, and hospitals. A 403(b) typically offers annuities as an investment choice, while a 401(k) typically offers mutual funds.

An IRA (Individual Retirement Account) is different because you open it yourself, not through an employer. You can contribute up to $7,000 per year (or $8,000 if you are 50 or older), and the money grows tax-free. You can withdraw it penalty-free at 59½, just like a 403(b). However, an IRA has lower contribution limits and is not tied to your job.

If you have both a 403(b) and an IRA, your contributions to each count separately toward their own limits — you can max out both in the same year. However, if you have a 403(b) and earn income from self-employment, you may also open a Solo 401(k) or SEP-IRA for the self-employment income, and those have their own limits.

What happens to your 403(b) if you leave your job

When you leave your employer, your 403(b) account stays with the investment provider — it does not disappear or revert to your employer. You can leave the money there and let it continue to grow, withdraw it (subject to the early withdrawal penalty if you are under 59½), or roll it over to an IRA or a 403(b) at your new employer if they offer one.

A rollover means moving the money from one retirement account to another without cashing it out. If you roll over to an IRA, you avoid taxes and penalties, and the money continues to grow tax-free. If you cash out instead, you owe income tax on the full amount and a 10 percent penalty if you are under 59½. Some plans allow you to take a loan against your balance instead, which you repay with interest.

If your new employer offers a 403(b), you can roll your old 403(b) directly into it. This keeps all your retirement savings in employer plans. Some people prefer this because employer plans have different rules and protections than IRAs, though IRAs often offer more investment choices.

Frequently Asked Questions

Can I contribute to a 403(b) if I work part-time?

Yes, if your employer offers a 403(b) plan to part-time employees. Some employers limit the plan to full-time workers only, so check with your benefits department. If you are part-time at one job and full-time at another, you can contribute to a 403(b) at each employer, but your total contributions across all plans cannot exceed the annual limit.

What if I need money before age 59½?

You can withdraw it, but you will owe income tax plus a 10 percent penalty on the amount withdrawn. Some plans allow loans instead, where you borrow against your balance and repay it with interest — this avoids the penalty but you must repay the loan or it becomes a taxable withdrawal. Check your plan documents to see if loans are available.

Do I have to contribute to my employer's 403(b)?

No, participation is voluntary. Your employer cannot force you to contribute. However, if your employer offers a match, you miss out on information programs if you do not contribute at least enough to capture the full match.

What if my employer stops offering a 403(b)?

Your existing account remains yours and continues to grow. You cannot make new contributions, but you can leave the money invested, withdraw it, or roll it to an IRA or another employer plan. Your employer must notify you of any plan changes and give you time to decide what to do with your money.

Can I change my contribution amount during the year?

Yes, you can increase or decrease your contribution at any time by contacting your benefits department, though some plans limit changes to certain dates. If you increase your contribution late in the year, you might exceed the annual limit, so plan ahead if you want to max out your contribution.