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

A 403(b) plan is a tax-deferred retirement account offered by public schools, colleges, universities, nonprofit organizations, and some government employers. It works similarly to a 401(k) but is designed specifically for these types of organizations. You contribute money from your paycheck before taxes are taken out, and that money grows without being taxed until you withdraw it in retirement.

The account is named after the section of the Internal Revenue Code that created it. Your employer does not have to match your contributions, though some do. You choose how your money is invested from the options your employer's plan offers, which are typically mutual funds or annuities.

Unlike a 401(k), a 403(b) can be offered through an annuity contract with an insurance company or through a custodial account holding mutual funds. This means the structure of your account depends on what your employer has set up, not on what you choose.

Key Takeaways

  • A 403(b) is available only to employees of schools, nonprofits, hospitals, and certain government organizations, not to private company workers.
  • You contribute pre-tax dollars, which lowers your taxable income in the year you contribute and reduces the taxes you owe.
  • Your contributions and earnings grow tax-deferred, meaning you pay no tax on the growth until you take money out.
  • Contribution limits for 2024 are $23,500 per year, with an additional $7,500 catch-up contribution allowed if you are 50 or older.
  • You cannot withdraw money before age 59½ without penalty in most cases, though some plans allow loans or hardship withdrawals.

Who can open a 403(b) and how contributions work

You can only open a 403(b) if your employer offers one. may be able to access employers include public school districts, private schools, colleges and universities, nonprofit hospitals, nonprofit charitable organizations, and certain government agencies. If you work for a for-profit company, your employer would offer a 401(k) instead, not a 403(b).

When you enroll, you choose what percentage of your paycheck to contribute. That amount is deducted before federal income tax is calculated, which means your taxable income for the year is reduced by the amount you contribute. If you earn $50,000 and contribute $5,000 to your 403(b), you only pay federal income tax on $45,000.

Some employers match a portion of your contributions, though this is less common in 403(b) plans than in 401(k) plans. If your employer does match, that money is added to your account on top of what you contribute yourself. Matching is always optional for the employer.

Annual contribution limits and catch-up contributions

For 2024, you can contribute up to $23,500 of your own money to a 403(b) each year. This limit is set by the IRS and changes most years. If you are 50 or older, you can contribute an additional $7,500 per year, bringing your total to $31,000. These catch-up contributions are designed to help workers save more as they approach retirement.

Your employer's matching contributions, if any, count toward a separate limit. The total of your contributions plus your employer's contributions cannot exceed $69,000 in 2024 (or $76,500 if you are 50 or older and your employer allows catch-up contributions). This combined limit is much higher than what most people contribute, so it rarely affects individual savers.

If you change jobs, you keep the money already in your 403(b). The contribution limits explore to all 403(b) accounts you have, combined — if you work two part-time jobs that both offer 403(b) plans, your total contributions to both accounts cannot exceed the annual limit.

Tax treatment: when you pay taxes on your money

A 403(b) is a pre-tax account, which means you do not pay federal income tax on the money you contribute or on the earnings that grow inside the account. You pay tax only when you withdraw the money in retirement. This is different from a Roth IRA, where you contribute after-tax dollars but withdrawals are tax-free.

When you withdraw money from your 403(b) after age 59½, the full amount you take out is taxed as ordinary income at whatever tax rate applies to you that year. If you withdraw $30,000 in a year when your tax bracket is 22%, you will owe $6,600 in federal income tax on that withdrawal (plus any state income tax, depending on where you live).

If you withdraw money before age 59½, you owe income tax on the withdrawal plus a 10% early withdrawal penalty, with limited exceptions. Some plans allow you to borrow from your 403(b) or to take a hardship withdrawal for specific reasons like medical bills or preventing eviction, but these options vary by plan.

How 403(b) investments are structured and managed

Your 403(b) can be held in one of two structures: an annuity contract or a custodial account. An annuity is a contract with an insurance company that guarantees a certain return or payment stream. A custodial account holds mutual funds and works more like a brokerage account. Your employer decides which structure to offer; you do not choose between them.

Within your account, you select from the investment options your employer's plan provides. These are typically mutual funds, target-date funds (which automatically shift from stocks to bonds as you near retirement), or stable value funds (which aim for steady, modest returns). You can usually change your investment choices once or twice per year, or when your life circumstances change.

Unlike a 401(k), a 403(b) does not require your employer to offer a wide range of investment choices. Some plans offer only a few options. You are responsible for choosing how to invest your money; your employer is not required to provide financial information.

Withdrawals, loans, and what happens when you leave your job

You can withdraw money from your 403(b) starting at age 59½ without penalty. You must begin taking withdrawals by April 1 of the year after you turn 73 (this age changed from 72 in 2023). The IRS requires you to withdraw a minimum amount each year based on your age and account balance; this is called a required minimum distribution or RMD.

Some 403(b) plans allow you to borrow against your account balance. If your plan offers loans, you can typically 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, the unpaid balance is treated as a withdrawal and taxed accordingly.

If you leave your job, you have several options for the money in your 403(b): leave it in the plan if your balance is above a certain amount (usually $5,000), roll it over to an IRA, roll it to a new employer's 403(b) or 401(k), or withdraw it (which triggers taxes and penalties if you are under 59½). You do not have to decide when ready, but rolling over to an IRA often gives you more investment choices.

403(b) vs. other retirement accounts: how they compare

A 403(b) and a 401(k) work similarly but serve different employers. A 401(k) is for private company employees; a 403(b) is for school and nonprofit employees. Both offer the same annual contribution limit ($23,500 in 2024), both are pre-tax accounts, and both have the same age for penalty-free withdrawals (59½). The main difference is that 403(b) plans are less regulated and often offer fewer investment choices.

A 403(b) and an IRA are different types of accounts. An IRA is an individual account you open on your own, not through an employer. The contribution limit for an IRA is much lower: $7,000 in 2024 (or $8,000 if you are 50 or older). However, an IRA typically offers more investment choices because you can open one with any financial institution. You can have both a 403(b) and an IRA at the same time, though there are income limits on deducting IRA contributions if you have a 403(b).

A 457(b) plan is another employer-sponsored account available to certain government employees. It has the same contribution limit as a 403(b) but different withdrawal rules — you can withdraw penalty-free at any age if you leave your job, not just at 59½. If your employer offers a 457(b), you can contribute to both a 403(b) and a 457(b) in the same year, with separate contribution limits for each.

Frequently Asked Questions

Can I have a 403(b) and an IRA at the same time?

Yes. You can contribute to both in the same year. However, if your income exceeds certain thresholds and you have a 403(b) through your employer, you may not be able to deduct contributions to a traditional IRA on your taxes. A Roth IRA has different income limits. Check the IRS rules for your specific situation.

What happens to my 403(b) if I leave my job?

The money stays yours. You can leave it in your former employer's plan, roll it to an IRA, transfer it to a new employer's 403(b) or 401(k), or withdraw it. If you withdraw before 59½, you owe income tax plus a 10% penalty unless an exception applies. Rolling to an IRA is often the best option because it gives you more control over investments.

Can I withdraw money from my 403(b) before age 59½?

Not without penalty in most cases. You owe income tax plus 10% penalty. Some plans allow hardship withdrawals for specific reasons like medical expenses or preventing eviction, or loans against your balance. Check your plan documents to see what options are available.

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

No. Contributing is optional. However, if your employer offers matching contributions, you miss out on that information programs if you do not contribute. Even a small contribution can capture an employer match if one is offered.

How much should I contribute to my 403(b)?

That depends on your income, expenses, and retirement goals. A common guideline is to save 10% to 15% of your gross income across all retirement accounts, but your situation may be different. Consider how much you can afford to contribute without affecting your current budget.