A 403(b) is a retirement savings plan for employees of schools, nonprofits, and hospitals

A 403(b) plan is a retirement account that lets you set aside money from your 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 people who work for schools, colleges, universities, nonprofits, and certain hospitals — not for-profit companies.

Your employer does not have to offer a 403(b), and many do not. If your school or nonprofit does offer one, you decide how much to contribute each pay period, and your employer deducts that amount from your paycheck. The money goes into an investment account you choose, usually managed by a company like Fidelity, Vanguard, or TIAA.

The main benefit is that you pay less in income tax now because the money never reaches your taxable income. When you retire and start withdrawing the money, you will owe income tax on those withdrawals — but by then you may be in a lower tax bracket.

Key Takeaways

  • A 403(b) is only available to employees of schools, colleges, nonprofits, and certain hospitals, not private companies.
  • You contribute pre-tax money from your paycheck, which reduces your taxable income for the year.
  • The money grows tax-free inside the account until you withdraw it after age 59½.
  • Your employer may match part of your contribution, though they are not required to.
  • You can usually borrow from your 403(b) balance or withdraw it early in certain hardship situations, though both have tax consequences.

How contributions work and what you can contribute

You choose a percentage of your paycheck to contribute to your 403(b) — for example, 5% or 10% — and your employer deducts that amount before calculating your taxes. The money goes directly into your account with the investment company your employer has selected.

The IRS sets a limit on how much you can contribute each year. For 2024, the limit is $23,500 if you are under age 50. If you are 50 or older, you can contribute an additional $7,500 per year (called a catch-up contribution), for a total of $31,000. These limits change yearly, and your employer should tell you the current limit.

Some employers offer a match, meaning they contribute money to your account based on what you contribute. For example, an employer might match 50% of what you contribute, up to 6% of your salary. A match is information programs, so if your employer offers one, it usually makes sense to contribute at least enough to get the full match.

Investment choices and how your money grows

When you open a 403(b), you choose how to invest the money. Most plans offer mutual funds, target-date funds (which automatically become more conservative as you approach retirement), and sometimes individual stocks or bonds. The investment company manages the account, but you decide where your money goes.

Your money grows tax-free inside the account. If a mutual fund earns 7% in a year, you do not owe taxes on that 7% gain. That tax-free growth compounds over decades, which is why starting early makes a big difference. By contrast, if you invested the same money in a regular taxable account, you would owe taxes on the gains each year, which slows growth.

You can usually change your investment choices once or twice a year, or when your life circumstances change (like a raise or a job change). Some plans let you change more often. Check with your employer's plan administrator or the investment company's website to see what your plan allows.

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

You can withdraw money from your 403(b) without penalty after age 59½. If you withdraw before that age, you owe a 10% early withdrawal penalty on top of regular income tax, unless you may have access to for an exception.

The main exceptions to the early withdrawal penalty are: you are no longer employed by that employer and you are at least 55 years old; you have a serious medical expense; you are disabled; you are a beneficiary receiving money after the account holder's death; or you need money for a specific hardship (like preventing eviction or paying medical bills). Hardship withdrawals are strict — you must show you have no other way to pay for the expense, and you may have to repay the money.

When you withdraw money, you owe income tax on the full amount withdrawn. If you withdraw $10,000 and you are in the 22% tax bracket, you will owe $2,200 in federal income tax, plus any state income tax. This is why withdrawing early is usually a last resort — you lose both the money and the years of tax-free growth it would have had.

Loans from your 403(b) and when they make sense

Many 403(b) plans let you borrow from your own balance. You repay the loan to yourself with interest, and the interest goes back into your account. Loans are usually limited to 50% of your balance or $50,000, whichever is less, and you typically have five years to repay.

A loan can be useful if you need money for something important and you want to avoid the 10% early withdrawal penalty. However, you lose the tax-free growth on the money you borrowed while it is out of the account. If you leave your job before you repay the loan, you usually have to repay the full remaining balance within 60 days or it becomes a taxable withdrawal with the 10% penalty.

Before taking a loan, ask your plan administrator what the interest rate is, how long you have to repay, and what happens if you leave your job. Some plans charge fees for loans, which also reduces the benefit.

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

If you leave your job, you have several options for your 403(b) balance. You can leave the money in the plan if your balance is above a certain amount (usually $5,000), move it to your new employer's retirement plan if they offer one, or roll it over to an Individual Retirement Account (IRA). Each option has different rules and tax consequences.

A rollover means moving the money directly from one account to another without touching it yourself. This is the cleanest option because the money is never in your hands, so there are no tax withholding issues. If you do not do a rollover and the plan sends you a check, the plan will withhold 20% for federal taxes, and you have only 60 days to deposit the full amount (including the 20% withheld) into another retirement account or you will owe taxes and penalties on the whole thing.

If you roll over to an IRA, you get more investment choices and usually lower fees than a 403(b) plan. However, you lose access to certain protections and loan options that the 403(b) may have offered. Talk to the investment company or a tax professional before deciding.

Fees and expenses you should know about

403(b) plans charge fees, and they vary widely depending on the investment company and the specific investments you choose. Common fees include an annual account maintenance fee (sometimes $25 to $50 per year), investment management fees (usually 0.5% to 1.5% of your balance per year), and sometimes a loan origination fee if you borrow.

These fees may seem small, but they compound over decades. A 1% annual fee on a $100,000 balance costs $1,000 that year alone, and that $1,000 would have grown tax-free if you had not paid the fee. Over 20 years, high fees can cost you tens of thousands of dollars in lost growth.

Ask your employer for a fee disclosure document, which shows all the fees in your plan. Compare the fees across different investment options within your plan. If your plan has very high fees, talk to your employer about whether they would consider switching to a lower-cost provider.

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 total amount you contribute to all retirement accounts may be limited. The 403(b) limit ($23,500 in 2024) is separate from the IRA limit ($7,000 in 2024), so you could theoretically contribute to both. However, if you have a workplace retirement plan, your ability to deduct IRA contributions on your taxes may be reduced depending on your income.

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

You can open an Individual Retirement Account (IRA) on your own through a bank or investment company. An IRA has lower contribution limits than a 403(b), but you have more control over your investments and usually lower fees. Some nonprofits and schools also offer a straightforward IRA or SEP IRA as an alternative.

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

No. Contributing is optional. However, if your employer offers a match, you are leaving information programs on the table by not contributing at least enough to get the full match. Even a small contribution of 3% to 5% can add up significantly over a career.

What is the difference between a 403(b) and a 401(k)?

Both are employer-sponsored retirement plans with similar contribution limits and tax treatment. The main difference is who can offer them: 403(b) plans are for schools, nonprofits, and hospitals, while 401(k) plans are for for-profit companies. 403(b) plans sometimes have higher fees and fewer investment choices, but they also have some unique protections.

Can I withdraw money from my 403(b) if I am still working?

It depends on your plan. Some plans allow "in-service withdrawals" or "in-service distributions" while you are still employed, though you may have to pay the 10% early withdrawal penalty if you are under 59½. Check your plan documents or ask your employer's benefits office what your plan allows.