A 403(b) is a retirement savings plan for teachers, nonprofit workers, and some government employees

A 403(b) plan is a retirement account that lets you set aside money from your paycheck before taxes are taken out. Your employer — typically a school, hospital, university, or nonprofit organization — offers it to you as part of your job. The money you contribute grows tax-free until you withdraw it in retirement, usually after age 59½.

The name comes from the section of the tax code that created it. Unlike a 401(k), which is common in for-profit companies, a 403(b) is designed specifically for employees of public schools, colleges, universities, hospitals, and tax-exempt organizations. Some government agencies also offer them.

You control how much of your paycheck goes into the plan, up to an annual limit set by the IRS. Your employer may also contribute money on your behalf, though this varies by organization. The account is yours — if you leave your job, you keep the money and can move it to another retirement account.

Key Takeaways

  • A 403(b) lets you contribute pre-tax money from your paycheck, and that money grows without being taxed until you withdraw it.
  • Only certain employers offer 403(b) plans: public schools, colleges, universities, hospitals, and tax-exempt nonprofits.
  • You choose how much to contribute each pay period, up to the IRS annual limit, which changes year to year.
  • Your employer may match part of your contribution, though the amount and rules depend on your specific organization's plan.
  • When you leave your job, you can roll your 403(b) balance into another retirement account or leave it where it is.

How contributions and employer matching work

You decide what percentage of your paycheck goes into your 403(b), and that amount is deducted before income taxes are calculated. This means you pay less in taxes now, which is the main advantage of the plan. For 2024, the IRS allows you to contribute up to $23,500 per year (the limit changes annually). If you are 50 or older, you can add an extra $7,500 in "catch-up" contributions.

Many employers match a portion of what you contribute — for example, they might put in 50 cents for every dollar you contribute, up to 3% of your salary. However, matching rules vary widely. Some nonprofits and schools match generously; others match nothing. Check your plan documents or ask your human resources department what your employer offers. Any employer contribution is information programs toward your retirement, so it is worth understanding what you are may have access to to.

Your contributions and any employer match are held in an investment account. You typically choose how that money is invested — usually from a menu of mutual funds or annuities offered by your plan provider. The growth on your investments is not taxed until you withdraw the money.

Investment options and plan providers

Unlike a 401(k), which is usually managed by one investment company, a 403(b) can be offered through multiple providers. Your employer may contract with one or more companies to manage the plan. Common providers include insurance companies (which offer annuities) and investment firms (which offer mutual funds). You may have a choice between them, or your employer may have selected one provider for you.

When you enroll, you will see a list of investment options — typically mutual funds, target-date funds, or annuities. A target-date fund automatically adjusts its mix of stocks and bonds as you get closer to retirement, which is a straightforward choice if you do not want to manage your investments actively. An annuity is an insurance product that guarantees you a certain income stream in retirement, though it usually costs more in fees.

Ask your plan administrator or provider for a fee schedule. 403(b) plans sometimes carry higher fees than 401(k) plans, so knowing what you are paying matters. Fees reduce the amount available for your retirement, so compare options if your employer offers more than one provider.

Vesting and access to your money

Your own contributions are always yours when ready — you are 100% vested in the money you put in. Employer contributions, however, may have a vesting schedule. This means you must work at the organization for a certain period before you own the employer's contribution outright. A common schedule is 25% per year over four years, meaning you own one-quarter of the employer match after one year, half after two years, and so on.

If you leave your job before you are fully vested, you forfeit the unvested portion of the employer contribution. For example, if you leave after two years with a four-year vesting schedule, you keep your own contributions plus 50% of the employer match, but the other 50% goes back to the plan. Your plan documents will state the exact vesting schedule, so review them or ask your HR department.

You cannot withdraw money from your 403(b) before age 59½ without penalty, with a few exceptions. If you leave your job at age 55 or later, you may withdraw without the 10% early withdrawal penalty (though you still owe income tax). Other exceptions include hardship withdrawals for medical expenses, education costs, or preventing eviction, though these have strict rules and require documentation.

Taxes when you withdraw

When you withdraw money from your 403(b) in retirement, that money is taxed as ordinary income at your current tax rate. If you withdraw $30,000 in a year and you are in the 22% tax bracket, you owe roughly $6,600 in federal income tax on that withdrawal (plus any state income tax, depending on where you live).

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

If you leave your job before retirement, you can roll your 403(b) into an individual retirement account (IRA) or into a 403(b) or 401(k) at your new employer. A rollover lets you keep the tax-deferred status of the money and may give you more investment options or lower fees. You have 60 days to complete a rollover, or the money is treated as a withdrawal and taxed.

How a 403(b) differs from a 401(k)

Both 403(b) and 401(k) plans are employer-sponsored retirement accounts with similar contribution limits and tax treatment. The main differences are who can offer them and how they are regulated. A 401(k) is offered by for-profit companies; a 403(b) is offered by nonprofits, schools, and government agencies. A 403(b) historically allowed higher catch-up contributions for long-term employees, though this changed in recent years.

403(b) plans also tend to have fewer investment options and sometimes higher fees than 401(k) plans, because they are often managed by insurance companies rather than large investment firms. If you move from a nonprofit to a for-profit company (or vice versa), you cannot roll a 403(b) directly into a 401(k) — you must roll it into an IRA first, then roll it into the new employer's 401(k) if the plan allows it.

Both plans offer the same tax advantage: your contributions reduce your taxable income now, and you pay taxes only when you withdraw in retirement. If your employer offers a match in either type of plan, contributing enough to get the full match is usually the best first step toward retirement savings.

Frequently Asked Questions

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

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 contribution limits are separate — you can put up to $23,500 in the 403(b) and up to $7,000 in an IRA (for 2024). Your tax deduction for IRA contributions may be limited if you have a 403(b) through your employer, so check the IRS rules for your income level.

What happens to my 403(b) if I get fired or laid off?

Your 403(b) balance stays in the account and belongs to you. You cannot access it penalty-free before age 59½ unless you meet an exception (like age 55 or older when you leave). You can roll it into an IRA or into a 403(b) or 401(k) at a new employer. If you need money when ready, you can withdraw it, but you will owe income tax plus a 10% penalty if you are under 59½.

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

No, contributing is optional. However, if your employer offers a match, not contributing means you are leaving information programs on the table. Even a small contribution — enough to capture the full employer match — is worth doing if you can afford it.

Can I change my investment choices after I enroll?

Yes. You can usually change how your money is invested and where new contributions go several times per year, or even more often depending on your plan. Contact your plan administrator or log into your account online to make changes. Changes typically take effect within a few business days.

What if my employer stops offering a 403(b)?

If your employer closes the plan, your balance remains yours. You will receive information about what happens next — usually you can roll the money into an IRA or another retirement account. Your employer must give you time to make this decision, typically at least 30 days.