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

A 403(b) plan is a tax-deferred retirement account that works similarly to a 401(k), but it is only available to people who work for specific types of employers. If you work for a public school, a nonprofit organization, a hospital, or certain government agencies, your employer may offer a 403(b) as a way to save for retirement. Money you put into the account reduces your taxable income for the year, and the money grows without being taxed until you withdraw it in retirement.

The name comes from Section 403(b) of the Internal Revenue Code, which is the tax rule that created this type of account. Because 403(b) plans are designed for employees of organizations that do not operate for profit, they have different rules than 401(k) plans used by for-profit companies.

Key Takeaways

  • A 403(b) plan lets you contribute pre-tax money from your paycheck, which lowers the income you report to the IRS that year.
  • Only employees of schools, nonprofits, hospitals, and certain government agencies can use a 403(b); your employer must offer one for you to open an account.
  • You can contribute up to $23,500 per year (as of 2024), and employees age 50 and older can add an extra $7,500 catch-up contribution.
  • You cannot withdraw money before age 59½ without paying a 10 percent penalty, except in specific hardship situations or if you leave your job.
  • A 403(b) is portable, meaning you can roll it into another retirement account if you change jobs.

How money flows in and out of your 403(b)

When you enroll in your employer's 403(b) plan, you choose how much to have deducted from each paycheck. That money goes directly into your retirement account before taxes are calculated, which is why it is called a pre-tax contribution. If you earn $50,000 a year and contribute $6,000 to your 403(b), you only report $44,000 as taxable income to the IRS.

The money you contribute is invested according to the options your employer's plan offers. Most 403(b) plans offer mutual funds and annuities. You choose which investments to put your money into, and those investments grow over time. You do not pay taxes on the growth until you withdraw the money.

When you turn 59½, you can start withdrawing money from your 403(b) without penalty. If you withdraw before that age, you owe a 10 percent early withdrawal penalty on top of regular income tax, unless you may have access to for an exception such as a hardship withdrawal or a substantially equal periodic payment arrangement.

Contribution limits and catch-up contributions

For 2024, you can contribute up to $23,500 of your own money to a 403(b) plan each year. This limit is set by the IRS and changes slightly most years. Your employer may also contribute money to your account, but employer contributions count toward a separate, higher limit.

If you are 50 or older, you can make an additional catch-up contribution of $7,500 per year, bringing your total to $31,000. This rule exists because people closer to retirement have less time to save, and the catch-up contribution helps them build their nest egg faster.

You cannot contribute more than you earn in a year. If you earn $20,000, you cannot contribute $23,500 even if you want to. Your payroll department will stop accepting contributions once you hit the limit for that year.

The difference between a 403(b) and a 401(k)

A 403(b) and a 401(k) serve the same purpose — they are both tax-deferred retirement accounts — but they exist for different types of employers. A 401(k) is for employees of for-profit companies. A 403(b) is for employees of nonprofits, schools, hospitals, and certain government agencies.

The contribution limits are the same, and both accounts have the same early withdrawal penalties. The main practical difference is that 403(b) plans often have fewer investment options than 401(k) plans, and 403(b) plans are sometimes offered through insurance companies that sell annuities rather than through investment firms. If you change jobs from a nonprofit to a for-profit company, you can roll your 403(b) into a 401(k) at your new employer.

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

Your 403(b) account belongs to you, not to your employer. When you leave your job, the money stays in the account and continues to grow. You have several options for what to do with it.

You can leave the money in your former employer's 403(b) plan if the balance is above a certain amount (usually $5,000). You can roll it into a new employer's 403(b) or 401(k) plan if your new job offers one. You can also roll it into an Individual Retirement Account (IRA), which gives you more control over your investments and often lower fees. If you need the money before age 59½, you can withdraw it, but you will owe income tax and the 10 percent early withdrawal penalty on the amount you take out.

Rolling your 403(b) into another account is usually the best option because it keeps the money growing tax-deferred and avoids the when ready tax hit of a withdrawal. Your new plan administrator or an IRA provider can walk you through the rollover process.

Employer contributions and matching

Some employers contribute money to your 403(b) account on top of what you contribute yourself. This is called an employer contribution. The most common type is a match, where your employer contributes a percentage of what you contribute — for example, 50 cents for every dollar you put in, up to 3 percent of your salary.

Employer contributions are not required by law, so not all 403(b) plans include them. If your employer does offer a match, it is information programs for retirement, so contributing enough to get the full match is usually a smart move. Check your plan documents or ask your human resources department whether your employer contributes and under what conditions.

Employer contributions count toward a different annual limit than your own contributions. For 2024, the total amount that can go into your account from all sources (you plus your employer) is $69,000. This higher limit means you can receive employer contributions without reducing how much you can contribute yourself.

Tax treatment and required minimum distributions

The money you contribute to a 403(b) reduces your taxable income in the year you contribute it. If you contribute $6,000, you save taxes on that $6,000 based on your tax bracket. This is why 403(b) contributions are attractive — they lower your tax bill today while you save for retirement.

When you withdraw money in retirement, you pay income tax on it at your regular tax rate. If you are in a lower tax bracket in retirement than you were while working, you may pay less tax overall. This is the main advantage of a tax-deferred account.

Starting at age 73, you must begin taking required minimum distributions (RMDs) from your 403(b). The IRS calculates the minimum amount based on your age and account balance. If you do not take the required amount, you owe a penalty. However, if you are still working for the employer that sponsors the plan, you may be able to delay RMDs until you actually retire.

Frequently Asked Questions

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

Yes. You can contribute to a 403(b) through your employer and also open and contribute to an IRA on your own. However, if you have a traditional IRA and earn too much money, your ability to deduct IRA contributions on your taxes may be limited. The IRS has income thresholds that determine this, and they vary based on your filing status and whether you have access to a workplace retirement plan.

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

Your 403(b) account is yours to keep. You cannot lose it because you lost your job. You can leave it where it is, roll it into a new employer's plan, or roll it into an IRA. If you need money right away, you can withdraw it, but you will owe taxes and a 10 percent penalty if you are under 59½, unless you may have access to for an exception.

Can I borrow money from my 403(b)?

Some 403(b) plans allow loans, but not all. If your plan allows it, you can typically borrow up to 50 percent of your account balance, up to $50,000. You repay the loan to yourself 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 you owe taxes and penalties.

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

No. A pension is a may provide monthly payment for life that your employer funds and manages. A 403(b) is an account you contribute to and control. With a 403(b), the amount you have at retirement depends on how much you contributed and how well your investments performed. Some nonprofits and schools still offer pensions, but they are becoming less common.

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

If your employer does not sponsor a 403(b), you can open a traditional or Roth IRA on your own through a bank, brokerage, or investment firm. An IRA has lower contribution limits than a 403(b), but it gives you full control over your investments and no employer involvement is needed.