A 403(b) is a retirement savings plan for teachers, nonprofit workers, and some government employees

A 403(b) is a retirement account that lets certain workers set aside money from their paycheck before taxes are taken out. The money grows tax-free until you withdraw it in retirement. It works similarly to a 401(k), but 403(b) plans are only available to employees of schools, colleges, hospitals, nonprofits with 501(c)(3) status, and some government agencies.

Your employer does not have to offer a 403(b) — it is optional. If your workplace does offer one, you decide how much to contribute each pay period, and your employer deducts that amount from your gross pay. The money goes into an investment account you choose, usually managed by an insurance company or investment firm your employer has selected.

The main reason people use a 403(b) is the tax break. Because contributions come out before income tax is calculated, you reduce your taxable income for the year. You pay no federal income tax on the money you contribute or the investment gains until you withdraw it after age 59½.

Key Takeaways

  • A 403(b) is only available to teachers, nonprofit employees, and certain government workers — not to private-sector employees.
  • Money you contribute reduces your taxable income in the year you contribute it, and the account grows tax-free until retirement.
  • You choose how much to contribute each pay period, up to an annual limit set by the IRS that changes yearly.
  • If you withdraw money before age 59½, you typically owe income tax plus a 10 percent penalty, with limited exceptions.
  • Your employer selects which investment providers offer plans, so your choices depend on what your workplace has contracted with.

How contributions and investment choices work

When you enroll in your employer's 403(b) plan, you specify a percentage of your paycheck or a dollar amount to contribute. This happens through payroll deduction, so the money never reaches your bank account — it goes straight to your investment account. Your employer sends the contributions to the investment provider on your behalf.

You then choose how to invest that money. Most 403(b) plans offer mutual funds, annuities, or both. An annuity is an insurance product that guarantees a fixed payment stream in retirement; a mutual fund is a pool of stocks or bonds you can buy shares in. Your employer decides which providers and which specific investments are available to you. You cannot straightforward pick any investment firm — you are limited to the vendors your workplace has selected.

The IRS sets an annual contribution limit. For 2024, the limit is $23,500 for workers under age 50. If you are 50 or older, you can contribute an additional $7,500 in "catch-up" contributions, for a total of $31,000. These limits change most years, so check with your plan administrator or the IRS website if you are near the cap.

The difference between 403(b) and 401(k) plans

Both 403(b) and 401(k) plans let you save for retirement with pre-tax money, and both have the same annual contribution limits. The main differences are who can use them and who manages them. A 401(k) is for private-company employees; a 403(b) is for nonprofit and education workers. A 401(k) is typically managed by a large financial services firm; a 403(b) is often managed by an insurance company.

Another practical difference: 403(b) plans historically had fewer rules about loans and withdrawals, though that has changed in recent years. Both plans now allow loans under similar conditions. If you leave your job, you can roll a 403(b) into an IRA or another employer plan, just as you can with a 401(k).

Tax treatment when you retire or withdraw money

When you turn 59½, you can withdraw money from your 403(b) without a penalty. You will owe federal income tax on the withdrawal, because you never paid tax on the contribution or the growth. The amount you withdraw is added to your other income for that year and taxed at your ordinary income tax rate.

If you withdraw money before age 59½, you owe income tax on the amount withdrawn plus a 10 percent early withdrawal penalty — unless an exception applies. Common exceptions include disability, a series of substantially equal payments, or a "hardship withdrawal" (though hardship rules are strict and defined by the IRS). Your plan administrator can tell you which exceptions your plan allows.

At age 73, the IRS requires you to begin taking required minimum distributions (RMDs) — a set amount each year based on your age and account balance. If you do not take the RMD, you owe a penalty on the amount you should have withdrawn.

What happens to your 403(b) if you change jobs

If you leave your job, you have several options for your 403(b) balance. You can leave it where it is if your balance is above a certain amount (usually $5,000), though you lose access to new contributions. You can roll it into an IRA, which gives you more investment choices and often lower fees. You can roll it into a 403(b) at your new employer if that employer offers a plan. Or you can cash it out, though you will owe taxes and a 10 percent penalty unless you are over 59½.

A rollover is the most common choice because it avoids when ready taxes and penalties. The money moves directly from your old plan to the new account — you do not touch it. If you receive a check instead, you have 60 days to deposit it into another retirement account, or the full amount becomes taxable income.

Employer contributions and matching

Some employers contribute to their employees' 403(b) plans, though this is less common than employer matching in 401(k) plans. When an employer does contribute, it is usually a flat percentage of salary or a match of what you contribute. For example, an employer might contribute 3 percent of your salary whether you contribute or not, or might match 50 percent of what you contribute up to 6 percent of your salary.

Employer contributions are always tax-free to you in the year they are made, just like your own contributions. They also count toward the annual contribution limit, so if your employer contributes $5,000 and you contribute $18,500, your total is $23,500 (the 2024 limit for workers under 50).

Fees and how to keep them low

403(b) plans, especially those invested in annuities, can carry higher fees than 401(k) plans or IRAs. Common fees include surrender charges (penalties for moving money out of an annuity), administrative fees, and investment expense ratios. Over decades, even small fee differences compound significantly.

Ask your plan administrator for a fee disclosure document, which employers are required to provide. Compare the expense ratios of the mutual funds available to you — lower is better. If your plan offers both annuities and mutual funds, mutual funds typically have lower ongoing costs. When you leave your job, rolling your balance into an IRA often gives you access to lower-cost investments.

Frequently Asked Questions

Can I have both a 403(b) and an IRA?

Yes. You can contribute to both in the same year, but the contribution limits are separate. Your 403(b) contributions do not reduce the amount you can contribute to an IRA. However, if you have a 403(b) at work, your ability to deduct IRA contributions may be limited depending on your income.

What if my employer does not offer a 403(b)?

You cannot open a 403(b) on your own — it must be offered by your employer. If your workplace does not offer one, you can open an IRA (Traditional or Roth) independently. Some nonprofits and schools also offer straightforward IRAs or SEP IRAs as alternatives.

Can I borrow from my 403(b)?

Many 403(b) plans allow loans, though not all do. If your plan allows it, you can typically borrow up to 50 percent of your balance or $50,000, whichever is less. You repay the loan through payroll deduction with interest. If you leave your job before repaying, the loan balance becomes taxable income.

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 matching contributions, you miss out on that money if you do not contribute at least the amount needed to receive the match.

What is the difference between a Traditional and Roth 403(b)?

A Traditional 403(b) reduces your current taxable income, and you pay tax when you withdraw in retirement. A Roth 403(b) uses after-tax money, but withdrawals in retirement are tax-free. Not all plans offer Roth options. Choose based on whether you expect to be in a higher or lower tax bracket in retirement.