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

A 403(b) account is a retirement savings plan offered by schools, hospitals, nonprofits, and some government agencies. You contribute money from your paycheck before taxes are taken out, and that money grows tax-free until you withdraw it in retirement. The account is named after the section of the tax code that created it.

The main difference between a 403(b) and a 401(k) is who can have one. A 401(k) is for employees of for-profit companies. A 403(b) is for employees of tax-exempt organizations — mainly public school teachers, college staff, hospital workers, and employees of charities and religious institutions. Some state and local government workers also have access to 403(b) plans.

Your employer sets up the 403(b) plan and chooses which investment company runs it. You decide how much to contribute from each paycheck, and you choose how that money is invested — usually from a menu of mutual funds or annuities the plan offers. The money stays in the account and compounds until you reach retirement age, typically 59½.

Key Takeaways

  • A 403(b) is a retirement account for nonprofit, school, hospital, and some government employees, funded through paycheck deductions before taxes.
  • Your contributions reduce your taxable income for the year, lowering the income tax you owe.
  • You choose how much to contribute each pay period, up to an annual limit set by the IRS.
  • The money grows tax-free inside the account, and you pay income tax only when you withdraw it after age 59½.
  • Your employer does not have to match your contributions, though some do.

How contributions work and what the tax benefit is

When you contribute to a 403(b), the money comes out of your paycheck before your employer calculates federal income tax. This means your taxable income for the year is lower, so you owe less in income tax. If you contribute $5,000 to your 403(b) in a year, you report $5,000 less as income on your tax return.

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 as a "catch-up" contribution, for a total of $31,000. These limits change each year, and your plan administrator or HR department can tell you the current year's limit.

Some employers match a portion of your contributions — for example, matching 50 cents for every dollar you contribute, up to 3% of your salary. Employer matches are not required, and the amount varies widely. Check with your HR department to see if your employer offers a match and what the terms are.

How the money grows and when you can withdraw it

Once money is in your 403(b), it is invested in the funds you selected. Those investments earn returns — dividends, interest, or capital gains — and all of that growth is tax-free while the money stays in the account. You do not pay tax on the earnings until you withdraw the money.

You can withdraw money from your 403(b) without penalty once you reach age 59½. If you withdraw before that age, you will owe income tax on the withdrawal plus a 10% early withdrawal penalty, with some exceptions. The exceptions include withdrawals for disability, certain medical expenses, or if you leave your job after age 55.

You must begin taking withdrawals by April 1 of the year after you turn 73. The IRS calls this a required minimum distribution, or RMD. The amount you must withdraw each year is based on your age and account balance. If you do not take the required amount, you owe a penalty.

The difference between a 403(b) and similar plans

A 401(k) works almost identically to a 403(b), but it is only for for-profit company employees. The contribution limits and tax treatment are the same. The main practical difference is that 401(k) plans are more heavily regulated and often offer more investment choices.

A 457(b) is another retirement plan for certain government employees. It has the same contribution limits as a 403(b) and similar tax benefits, but the rules around early withdrawal are different. Some government workers have access to both a 403(b) and a 457(b) and can contribute to both in the same year.

A traditional IRA is a retirement account anyone with earned income can open on their own, without an employer. The contribution limit is much lower — $7,000 per year for 2024 — and the tax deduction phases out if your income is high enough. A 403(b) has no income limits and allows much higher contributions, which is why it is the main retirement tool for school and nonprofit workers.

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

When you leave your job, your 403(b) account stays yours. You do not lose the money, and your employer cannot take it back. You have several options for what to do with it.

You can leave the money in the 403(b) plan with your former employer, if the plan allows it. You can roll it over into a new employer's 403(b) or 401(k) plan if you move to a new job. You can also roll it into a traditional IRA, which often gives you more investment choices and lower fees. A rollover means the money moves directly from one account to another without you touching it, so there is no tax consequence.

If you withdraw the money directly instead of rolling it over, you will owe income tax on the full amount, plus a 10% penalty if you are under 59½. This is almost always the most expensive option, so it is worth taking time to understand your rollover choices before you leave a job.

Common mistakes to avoid with a 403(b)

One frequent mistake is not contributing enough to capture an employer match. If your employer matches 3% of your salary and you only contribute 1%, you are leaving information programs on the table. Even if you cannot afford to contribute much, try to contribute at least enough to get the full match.

Another mistake is withdrawing money early to pay for an emergency or large expense. The 10% penalty plus income tax can take 30% to 40% of the withdrawal, and you lose years of tax-free growth on that money. A 403(b) is meant to stay invested until retirement, so treat it as off-limits except in true emergencies.

A third mistake is not reviewing your investment choices. Many 403(b) plans offer funds with high fees that eat into your returns over time. When you first enroll, spend time understanding what funds are available and whether any have lower fees. You can usually change your investment choices once or twice a year.

How to enroll in a 403(b) at your workplace

If your employer offers a 403(b), your HR or benefits department will give you enrollment materials, usually when you are hired or during an annual open enrollment period. You will fill out a form choosing how much to contribute each pay period and how to invest the money.

The enrollment form will list the investment options available in your plan. Read the descriptions of each fund — they usually show the fund's goal (growth, income, or balanced), its fees, and its past performance. If you are unsure which funds to choose, many plans offer a target-date fund that automatically adjusts its mix of investments as you get closer to retirement.

Once you enroll, your contributions will start coming out of your next paycheck. You can change your contribution amount or investment choices during open enrollment, or sometimes at any time during the year — check with your HR department about the rules at your workplace.

Frequently Asked Questions

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

Yes. You can contribute to both in the same year, up to each account's separate limit. However, if you have a 403(b) at work, the tax deduction for contributions to a traditional IRA may be reduced or eliminated, depending on your income. A Roth IRA has no income limits and does not affect your 403(b) deduction.

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

The money in your account goes to whoever you named as your beneficiary on the account. If you did not name a beneficiary, the money goes to your estate. You should review your beneficiary designation when you enroll and update it if your circumstances change.

Can my employer take money out of my 403(b) for any reason?

No. Your 403(b) is your property. Your employer cannot withdraw money from it or use it to pay a debt you owe the company. The only exception is if a court orders a withdrawal as part of a divorce settlement or child support order.

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

No. A pension is a may provide monthly payment for life, funded entirely by your employer. A 403(b) is funded by your contributions and grows based on investment returns. You control how much goes in and how it is invested, and the amount you have at retirement depends on how much you saved and how well your investments performed.

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

If you work for a nonprofit or school that does not offer a 403(b), you can open a traditional or Roth IRA on your own through a bank, brokerage, or investment company. The contribution limit is lower, but the tax benefits are similar. Some nonprofits also offer a straightforward IRA, which is a middle ground between an IRA and a 403(b).