A 403(b) is a retirement savings plan for certain nonprofit and public employees

A 403(b) is a retirement savings account offered by schools, hospitals, nonprofits, and some government agencies. It works similarly to a 401(k) — you contribute money from your paycheck before taxes are taken out, the money grows over time, and you withdraw it in retirement. The main difference is who can use it: 403(b) plans are for employees of tax-exempt organizations, not for-profit companies.

Your employer does not have to offer a 403(b), and not all nonprofits do. If your workplace offers one, you decide how much to contribute each pay period, up to an annual limit set by the IRS. The money you put in reduces your taxable income for that year, which lowers your tax bill.

Key Takeaways

  • A 403(b) is a tax-deferred retirement account available to employees of nonprofits, schools, hospitals, and certain government agencies.
  • You contribute pretax money from your paycheck, which lowers your income taxes in the year you contribute.
  • Your employer may match a portion of your contributions, though they are not required to.
  • You cannot withdraw money before age 59½ without penalty, with limited exceptions for hardship or separation from service.
  • The annual contribution limit changes each year and is set by the IRS.

How contributions work and what your employer may match

When you enroll in a 403(b), you choose a percentage of your gross pay to contribute each pay period. This amount comes out before federal income tax is calculated, so your take-home pay is reduced by less than the full contribution amount. For example, if you contribute $200 per paycheck and are in the 22% tax bracket, your take-home pay drops by about $156 instead of $200.

Some employers match a portion of what you contribute — for instance, they might match 50% of contributions up to 3% of your salary. This is information programs and reduces the amount you have to save on your own. However, matching is optional; many nonprofits and schools do not offer it. Check with your human resources or benefits department to see whether your employer matches and under what terms.

Investment options and how your money grows

Unlike a traditional savings account, the money in your 403(b) is invested. Your plan offers a menu of investment options — typically mutual funds, annuities, or a combination of both. You choose how to divide your contributions among these options based on your comfort with risk and how far away retirement is.

The growth of your account depends on how well those investments perform. If you choose conservative options, your money grows slowly but with less risk. If you choose growth-oriented options, your money may grow faster but can also lose value in down markets. Most plans let you change your investment choices once or twice per year, and some allow changes whenever you want.

Tax treatment: contributions and withdrawals

Money you contribute to a 403(b) is not taxed in the year you contribute it. This is called a pretax contribution, and it reduces your taxable income. If you earn $50,000 and contribute $5,000 to your 403(b), you only pay income tax on $45,000 that year.

When you withdraw money in retirement, you pay income tax on it then. This is the trade-off: you save on taxes now, but you will owe taxes later. The assumption is that you will be in a lower tax bracket in retirement, so you will pay less overall. If you withdraw money before age 59½, you typically owe a 10% penalty on top of income tax, with some exceptions for hardship withdrawals or separation from service.

Withdrawal rules and penalties

You generally cannot touch your 403(b) money without penalty until you turn 59½. At that age, you can withdraw as much or as little as you want, whenever you want, and you only owe income tax — no penalty.

Before 59½, you can withdraw money only in specific situations. These include financial hardship (defined narrowly by the IRS), separation from service (leaving your job), disability, or death. Some plans also allow loans against your balance. If you withdraw before 59½ outside these exceptions, you owe income tax plus a 10% penalty on the amount withdrawn. The penalty is steep, so withdrawing early should be a last resort.

At age 73, you must begin taking required minimum distributions — the IRS requires you to withdraw a certain amount each year based on your age and account balance. This ensures the government eventually collects taxes on the money.

Vesting and what happens if you leave your job

Money you contribute yourself is always yours — you are when ready vested in your own contributions. If your employer makes matching contributions, those may have a vesting schedule. For example, you might be 25% vested after one year, 50% after two years, and fully vested after four years. This means if you leave before you are fully vested, you forfeit the unvested portion of the employer match.

When you leave your job, you have several options for the money in your 403(b). You can leave it in the plan if your balance is above a certain amount (usually $5,000), roll it into an IRA or a new employer's retirement plan, or withdraw it (though you will owe taxes and possibly a penalty). Rolling it over to an IRA or new plan avoids when ready taxes and keeps the money growing tax-deferred.

Contribution limits and catch-up contributions

The IRS sets an annual limit on how much you can contribute to a 403(b). This limit changes most years. For 2024, the limit is $23,500 for people under 50. If you are 50 or older, you can contribute an additional $7,500 as a catch-up contribution, bringing your total to $31,000. These limits explore across all 403(b) plans you participate in — if you work for two nonprofits, your combined contributions cannot exceed the annual limit.

Your employer's matching contributions do not count toward your personal limit, but they do count toward a higher combined limit that includes both employee and employer contributions. Ask your benefits department what the combined limit is for your plan.

Frequently Asked Questions

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

Yes. You can contribute to both a 403(b) and a traditional or Roth IRA in the same year. However, if you have a traditional IRA and a 403(b), the deductibility of your IRA contributions may be limited depending on your income. A Roth IRA has no income limits and does not affect your 403(b).

What happens to my 403(b) if I die?

Your 403(b) passes to your beneficiary — usually a spouse, child, or other person you named when you opened the account. They can roll it into their own IRA or take distributions over time. If you did not name a beneficiary, the money goes to your estate and may be subject to probate.

Can I borrow from my 403(b)?

Some plans allow loans, but not all. If your plan permits loans, you typically can borrow up to 50% of your vested balance, up to $50,000. You repay the loan with interest, and the interest goes back into your account. If you leave your job before repaying, the loan balance is usually treated as a withdrawal and taxed.

Is a 403(b) the same as a pension?

No. A pension is funded entirely by your employer and pays you a set amount each month in retirement. A 403(b) is funded by you (and possibly your employer), and the amount you receive depends on how much you contributed and how well your investments performed. Pensions are rare now; most nonprofits and schools offer 403(b)s instead.

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

You can open a traditional or Roth IRA on your own through a bank or brokerage. An IRA has lower contribution limits than a 403(b), but it gives you more control over your investments and is portable if you change jobs.