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

A 403(b) plan is an employer-sponsored retirement account that works similarly to a 401(k), but it is only available to people who work for schools, tax-exempt nonprofits, certain religious organizations, and some government employers. You contribute money from your paycheck before taxes are taken out, and that money grows tax-deferred until you withdraw it in retirement. Your employer may also contribute money on your behalf, though this is not required.

The name comes from the section of the Internal Revenue Code that created it. These plans have been around since 1958 and were originally designed for teachers and clergy. Today they serve millions of employees across education, healthcare, social services, and other nonprofit sectors.

The basic mechanics are straightforward: you decide what percentage of your salary to contribute each pay period, that amount is deducted before income tax is calculated, and you choose how to invest the money from a menu your employer's plan offers. When you turn 59½, you can begin withdrawing money without penalty. If you withdraw before that age, you generally owe a 10 percent early withdrawal penalty plus income tax on the amount withdrawn.

Key Takeaways

  • A 403(b) is available only to employees of schools, nonprofits, religious organizations, and certain government agencies, not to private company workers.
  • You contribute pre-tax dollars from your paycheck, which reduces your taxable income for the year and allows your money to grow without annual tax bills.
  • Your employer may match a portion of your contributions, though they are not required to do so, and the match terms vary widely by employer.
  • Contribution limits for 2024 are $23,500 per year for people under 50, with an additional $7,500 catch-up contribution allowed for those 50 and older.
  • You can withdraw money penalty-free starting at age 59½, but withdrawals before that age typically trigger a 10 percent penalty plus income tax.

Who can open a 403(b) and how it differs from a 401(k)

You can only open a 403(b) if your employer offers one. This means your employer must be a school district, a nonprofit organization with 501(c)(3) tax status, a church or other religious organization, or a may have access to government agency. If you work for a private company, your employer would offer a 401(k) instead, not a 403(b).

The main differences between a 403(b) and a 401(k) are who can use them and how they are regulated. A 403(b) is simpler to set up and administer than a 401(k), which is why nonprofits and schools prefer them. A 401(k) requires more formal governance and compliance procedures. Both allow the same annual contribution limits, both offer employer matching (if the employer chooses), and both impose the same early withdrawal penalties. The investment options in a 403(b) are often more limited than in a 401(k), because 403(b) plans traditionally offered only annuities, though many now also offer mutual funds.

If you change jobs and move from a nonprofit to a private company, you cannot continue contributing to your old 403(b), but you can leave the money there or roll it into an Individual Retirement Account (IRA) or your new employer's 401(k). The same applies in reverse: if you move from a private company to a nonprofit, you cannot roll a 401(k) into a 403(b), but you can roll it into an IRA and then contribute to the new 403(b) going forward.

How much you can contribute each year

For 2024, you can contribute up to $23,500 of your own salary to a 403(b) if you are under age 50. If you are 50 or older, you can contribute an additional $7,500 per year as a catch-up contribution, for a total of $31,000. These limits are set by the IRS and change most years to keep pace with inflation.

Your employer may also contribute to your account. Some employers match a percentage of what you contribute—for example, 50 cents for every dollar you contribute, up to 6 percent of your salary. Others contribute a flat amount or a percentage of your salary regardless of whether you contribute. The amount your employer contributes does not count toward your personal contribution limit, but the combined 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 making catch-up contributions).

You decide how much to contribute by filling out a salary reduction agreement with your employer's human resources or benefits department. You can change your contribution amount once per year, or more often if you have a may have access to life event such as marriage, divorce, birth of a child, or significant change in income.

Tax treatment: when you pay taxes on your money

Money you contribute to a 403(b) is deducted from your paycheck before federal income tax is calculated. This means your taxable income for the year is reduced by the amount you contribute. If you earn $60,000 and contribute $6,000 to your 403(b), you only pay federal income tax on $54,000. This is called a pre-tax contribution, and it is the default option in most 403(b) plans.

You do not pay income tax on the money in your account or on the investment gains while the money sits there. Tax is deferred until you withdraw the money. When you withdraw money in retirement, you pay income tax on the full amount withdrawn at your tax rate in that year. If you withdraw $50,000 in a year when you have little other income, you may pay tax at a lower rate than you did while working. If you withdraw a large amount in a single year, you may pay tax at a higher rate.

Some 403(b) plans also offer a Roth option, which works differently. With a Roth contribution, you pay income tax on the money now, but withdrawals in retirement are tax-free. Roth contributions count toward the same $23,500 annual limit as pre-tax contributions, so you cannot do both at maximum. The choice between pre-tax and Roth depends on whether you expect your tax rate to be higher or lower in retirement than it is now.

When you can withdraw money and what happens if you withdraw early

You can withdraw money from your 403(b) without penalty once you reach age 59½. You can also withdraw without penalty if you become disabled, if you are facing a financial hardship that meets IRS rules, or if you separate from your employer after age 55 (this last rule applies only to 403(b) plans, not to 401(k)s). In all other cases, withdrawals before age 59½ are subject to a 10 percent early withdrawal penalty plus income tax on the amount withdrawn.

A hardship withdrawal is allowed for specific reasons: to pay for medical expenses, to prevent eviction or foreclosure, to pay for higher education expenses, or to pay for burial or funeral expenses. You must show that you have no other way to pay for the expense and that you have exhausted other options such as loans from the plan. Not all 403(b) plans allow hardship withdrawals, so you need to check your plan documents.

You are required to begin taking withdrawals from your 403(b) starting April 1 of the year after you turn 73. These are called required minimum distributions (RMDs), and the IRS calculates the amount based on your age and account balance. If you do not take the required amount, you owe a 25 percent penalty on the shortfall (or 10 percent if you correct it within two years).

If you leave your job, you can roll your 403(b) balance into an IRA or into your new employer's retirement plan if they allow it. A rollover is not a withdrawal, so you do not pay tax or penalty. You have 60 days to complete the rollover, or the money is treated as a withdrawal and becomes taxable.

Employer matching and vesting

Many employers contribute money to your 403(b) as an incentive to save. The most common form is a matching contribution: your employer matches a percentage of what you contribute, up to a certain limit. For example, an employer might match 100 percent of the first 3 percent you contribute and 50 percent of the next 2 percent. This means if you contribute 5 percent of your salary, your employer contributes 4 percent.

Some employers instead make a non-elective contribution, which means they contribute a set percentage of your salary to everyone's account regardless of whether you contribute. For example, an employer might contribute 3 percent of your salary to your 403(b) automatically. A few employers do both: they match contributions and also make a non-elective contribution.

Vesting refers to when the money your employer contributes becomes yours to keep. Some employers make contributions when ready vested, meaning the money is yours right away. Others use a vesting schedule, which means you must work there for a certain period before the employer's contributions are fully yours. A common schedule is 20 percent per year over five years, so after five years of employment, all of your employer's contributions are vested. If you leave before the vesting period is complete, you forfeit the unvested portion. Your own contributions are always 100 percent vested when ready.

Investment options and how your money grows

Your 403(b) plan offers a menu of investment options, and you choose how to allocate your contributions among them. The most common options are mutual funds, target-date funds, and annuities. A target-date fund is a single investment that automatically adjusts its mix of stocks and bonds based on your expected retirement year, becoming more conservative as you get closer to retirement. This is a straightforward option if you do not want to manage your investments actively.

An annuity is a contract with an insurance company that guarantees you a certain payment for life once you retire. Some 403(b) plans offer only annuities, while others offer both annuities and mutual funds. Annuities provide predictability but typically have higher fees than mutual funds. Mutual funds offer more flexibility and often lower costs but do not may provide a specific payment amount.

The investment options available to you depend entirely on what your employer's plan offers. You cannot choose investments outside the plan menu. Some employers offer dozens of options; others offer only a handful. You can usually change how your contributions are invested once per year, or more often if you have a significant life event. Money already invested can often be moved between options, though some plans restrict this.

Fees and costs associated with a 403(b)

Your 403(b) plan charges fees, and these fees reduce the amount of money available to grow for your retirement. Fees come in several forms: investment fees (charged by the mutual fund or annuity company), administrative fees (charged by the plan to cover record-keeping and customer service), and advisor fees (if you pay someone to help you manage your investments).

Investment fees are expressed as an expense ratio, which is a percentage of your account balance charged annually. A fund with a 0.5 percent expense ratio costs $50 per year for every $10,000 invested. Over decades, even small differences in fees add up significantly. Target-date funds typically charge between 0.3 and 1 percent annually. Annuities often charge higher fees, sometimes 1 percent or more.

Administrative fees vary by plan. Some employers cover these costs for employees; others charge a flat fee per year or a percentage of your account balance. You should receive a fee disclosure document from your plan that lists all fees. If you do not understand the fees or cannot find them, contact your employer's benefits department.

Frequently Asked Questions

Can I have both 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 contribute to a Traditional IRA and you are covered by a 403(b) at work, your IRA contribution may not be tax-deductible depending on your income. Roth IRA contributions are not affected by having a 403(b).

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

Your money stays in the account and continues to grow. You can leave it there, roll it into an IRA, or roll it into your new employer's retirement plan if they accept rollovers. You cannot make new contributions to a 403(b) from a previous employer, but you can continue to invest the money already there.

Can I borrow 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 vested balance, up to $50,000. You must repay the loan with interest, usually within five years. If you leave your job before repaying the loan, the unpaid balance is treated as a withdrawal and becomes taxable.

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

No. A pension is a defined benefit plan where your employer guarantees you a specific monthly payment in retirement based on your salary and years of service. A 403(b) is a defined contribution plan where you and your employer contribute money, and your retirement income depends on how much was contributed and how well the investments performed. Some employers offer both.

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

If you work for a nonprofit or school and your employer does not offer a 403(b), you can open a Traditional or Roth IRA on your own. The contribution limits are lower than a 403(b), but an IRA gives you control over your investments and fees. You can also ask your employer's benefits department whether they plan to offer a 403(b) in the future.