A 403(b) is a retirement savings account your employer offers, where you set aside money from your paycheck before taxes

A 403(b) plan is a retirement account designed for employees of schools, colleges, universities, hospitals, and other nonprofit organizations. You contribute money directly from your paycheck, and that money grows tax-deferred until you withdraw it in retirement. The account is named after the section of the tax code that created it.

Unlike a 401(k), which is common in for-profit companies, a 403(b) is specifically for nonprofit employers. Your employer may or may not match your contributions — that varies by organization. The money you put in reduces your taxable income for the year, which lowers your tax bill.

You choose how much to contribute each pay period, up to an annual limit set by the IRS. That limit changes each year. For 2024, the limit is $23,500 if you are under 50, and $31,000 if you are 50 or older (the extra $7,500 is called a catch-up contribution). These limits may be different in 2025 and beyond.

Key Takeaways

  • A 403(b) is offered by schools, nonprofits, and hospitals, and lets you save for retirement with pretax dollars that grow tax-deferred.
  • You direct money from your paycheck into the account, and your employer may add matching contributions depending on their policy.
  • The IRS sets annual contribution limits, and you cannot withdraw money before age 59½ without a penalty unless you meet certain exceptions.
  • Your 403(b) balance is portable — if you leave your job, you can roll it into another retirement account or keep it where it is.

How contributions work and what happens to your money

You tell your employer's payroll department how much of each paycheck you want to put into your 403(b). That amount is deducted before income tax is calculated, so it lowers your taxable income. If you earn $50,000 a year and contribute $6,000 to your 403(b), you only pay income tax on $44,000.

Your contributions go into an investment account you choose from a list your employer provides. Common options are mutual funds, target-date funds (which shift from stocks to bonds as you near retirement), and stable value funds (which act like savings accounts but offer slightly higher returns). The money you invest grows over time, and you do not pay taxes on that growth until you withdraw it.

Some employers match a portion of what you contribute — for example, they might add 50 cents for every dollar you put in, up to 3% of your salary. Not all nonprofits offer matching, so check with your human resources department to see what your employer provides. Matching is information programs, so contributing enough to get the full match is usually worth doing.

Withdrawal rules and penalties for early access

You can withdraw your money penalty-free starting at age 59½. If you withdraw before that age, the IRS charges a 10% penalty on top of income tax owed. For example, if you withdraw $10,000 at age 45, you pay income tax on that $10,000 plus a $1,000 penalty.

Some situations let you withdraw early without the 10% penalty. These include disability, a may have access to medical expense, a loan from the plan (if your employer offers it), or a hardship withdrawal for when ready financial need. Hardship withdrawals have strict rules — you must show you cannot get the money any other way, and your employer decides whether your situation qualifies. You still owe income tax on the withdrawal even if the penalty is waived.

You must start taking withdrawals by April 1 of the year after you turn 73. These are called required minimum distributions, or RMDs. The IRS calculates how much you must withdraw based on your age and account balance. If you do not take the full amount, you owe a 25% penalty on the shortfall (or 10% if you correct it within two years).

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

Your 403(b) belongs to you, not your employer. If you leave your job, the money stays in your account. You have several options: leave it where it is, roll it into a new employer's 403(b) or 401(k), or roll it into an individual retirement account (IRA).

A rollover means moving the money from one account to another without cashing it out. If you do a direct rollover, the money moves straight from your old plan to the new one, and you do not owe taxes or penalties. If you take the money yourself and deposit it within 60 days, you still avoid taxes and penalties, but the plan administrator may withhold 20% for taxes — you have to make up that difference from your own funds to complete the rollover.

Rolling into an IRA gives you more investment choices and often lower fees than staying in a 403(b). Rolling into a new employer's plan keeps everything in one place if you prefer that. You can also keep the money in your old 403(b) if you want, though you cannot add to it anymore.

Fees and how they affect your balance

Your 403(b) charges fees for managing the account and the investments inside it. These come in two types: administrative fees (charged by the plan itself) and investment fees (charged by the mutual funds or other investments you choose). Both reduce your returns over time.

Administrative fees vary widely. Some nonprofits negotiate low fees for their employees, while others charge more. Ask your human resources department what fees you pay. Investment fees are listed in each fund's prospectus, usually as an expense ratio — for example, 0.15% per year means you pay $15 annually for every $10,000 invested.

Even small fee differences add up over decades. A fund charging 0.50% per year costs significantly more than one charging 0.15% over 30 years of growth. When choosing investments, look at the expense ratio alongside the fund's performance history.

How a 403(b) differs from other retirement accounts

A 403(b) is similar to a 401(k) but designed for nonprofits instead of for-profit companies. Both let you contribute pretax money, both have the same annual contribution limits, and both charge a 10% penalty for early withdrawal. The main difference is the types of investments available — 403(b)s traditionally offered annuities (insurance products), while 401(k)s offer mutual funds. Today, most 403(b)s offer both.

An IRA (individual retirement account) is different because you open it on your own, not through an employer. You can contribute up to $7,000 per year (or $8,000 if you are 50 or older) in 2024. IRAs have lower contribution limits than 403(b)s, but you have complete control over investments and can open one even if your employer does not offer a retirement plan.

A Roth 403(b) is a variation where you contribute after-tax dollars instead of pretax dollars. Your contributions do not lower your current taxes, but withdrawals in retirement are tax-free. This is useful if you expect to be in a higher tax bracket in retirement or want tax-free growth.

Steps to set up your 403(b) and start contributing

Contact your employer's human resources or benefits department and ask for the 403(b) enrollment materials. They will give you a list of investment providers and funds available through your plan. Read the fund descriptions to understand what each one invests in — stocks, bonds, a mix, or a target date.

Decide how much to contribute each pay period. Start with what you can afford, even if it is a small amount. If your employer matches contributions, try to contribute at least enough to get the full match. You can change your contribution amount at any time, usually through an online portal or by submitting a form to payroll.

Complete the enrollment form, choose your investments, and submit it to your employer. The contributions will start on your next paycheck. You will receive statements showing your balance and how your investments are performing, usually quarterly or annually.

Frequently Asked Questions

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

Yes. You can contribute to a 403(b) through your employer and also open and fund an IRA on your own. However, your combined contributions to both accounts cannot exceed the annual IRS limit for that year. The limits are separate — you can max out a 403(b) and still contribute to an IRA, but your IRA contributions may not be tax-deductible if your income is above a certain threshold.

What happens to my 403(b) if I retire before 59½?

You can withdraw money, but you will owe a 10% early withdrawal penalty plus income tax on the amount withdrawn. Some plans offer a "substantially equal periodic payment" option that lets you withdraw without the penalty if you commit to taking equal amounts for at least five years or until age 59½, whichever is longer. Ask your plan administrator if this option is available.

Can my employer take my 403(b) balance if I leave?

No. Your 403(b) balance is always yours. Your employer cannot touch it or use it to offset anything you owe them. When you leave, you decide what happens to the money — you can roll it over, leave it invested, or withdraw it.

What is the difference between a 403(b) and an annuity?

An annuity is a type of investment product offered within some 403(b) plans. It is sold by insurance companies and guarantees a fixed payment for life. A 403(b) is the account itself, which can hold annuities, mutual funds, or other investments. Not all 403(b)s offer annuities anymore — many now focus on mutual funds.

Do I have to invest in the funds my employer offers, or can I choose my own?

You must choose from the list your employer provides. You cannot invest in funds outside the plan. However, most plans offer a range of options — different stock funds, bond funds, target-date funds, and stable value funds. If you disagree with the available choices, you can roll your balance to an IRA after you leave the job, where you have unlimited investment options.