A 403(b) is a retirement savings plan for employees of schools, nonprofits, and hospitals
A 403(b) is a retirement account that lets you set aside money from your paycheck before taxes are taken out. Your employer — typically a public school, college, nonprofit organization, or hospital — offers it as part of your benefits package. 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. It works similarly to a 401(k), which is the retirement plan most private companies offer, but 403(b) plans have different rules about how much you can contribute and what investments are available to you.
You do not have to use a 403(b) if your employer offers one, but it is one of the main ways people who work in education and nonprofits can save for retirement with a tax advantage.
Key Takeaways
- Money you put into a 403(b) reduces your taxable income for the year, and the account grows tax-free until you take money out.
- Your employer does not have to match your contributions, though some do — check your plan documents to see if yours does.
- You choose how your money is invested from the options your employer's plan offers, usually annuities or mutual funds.
- You can contribute up to $23,500 per year (as of 2024), or more if you are 50 or older or have worked at your employer for 15 years.
How money goes into your 403(b) account
You authorize your employer to deduct a set amount from each paycheck and send it to your 403(b) provider. This happens before income tax is calculated, which lowers the amount of federal income tax you owe that year. If you earn $50,000 and contribute $5,000 to your 403(b), you only pay income tax on $45,000.
You decide how much to contribute — your employer cannot force you to participate. You can change your contribution amount once a year during an open enrollment period, or sometimes if you have a major life change like a marriage or birth. Your employer's benefits office can tell you when enrollment happens and how to make changes.
Some employers match a portion of what you contribute, meaning they add their own money to your account. A common match is 3 to 5 percent of your salary. Not all 403(b) plans include a match, so check your plan summary or ask your HR department whether yours does.
What happens to the money you contribute
Your contributions go to a provider your employer has selected — usually an insurance company or investment firm. You choose how that money is invested from the options the provider offers. Most 403(b) plans offer annuities (insurance products that pay you a set amount in retirement) or mutual funds (baskets of stocks and bonds managed by professionals).
The money grows over time without being taxed. If your mutual fund earns $2,000 in a year, you do not pay tax on that $2,000 until you withdraw it. This tax-free growth is the main advantage of using a 403(b) instead of putting money in a regular savings account.
You are responsible for choosing your investments. Your employer's plan provider should offer educational materials or a website where you can see what options exist and how each one has performed. If you are unsure, many plans offer a target-date fund, which automatically adjusts how aggressive your investments are as you get closer to retirement.
When you can take money out
You can withdraw money from your 403(b) without penalty once you turn 59½, leave your job, become disabled, or face a financial hardship. If you withdraw money before 59½ for any other reason, you typically owe a 10 percent penalty on top of regular income tax.
Some plans allow you to borrow against your 403(b) balance while you are still working. The rules vary by plan — some let you borrow up to half your balance, others do not allow loans at all. If you borrow and then leave your job, you usually have to repay the loan quickly or it counts as a withdrawal and you owe taxes and penalties.
Once you reach age 73, you must start taking money out each year, whether you need it or not. The amount is calculated based on your age and account balance. Your plan provider will tell you how much you need to withdraw each year.
How contribution limits work
The IRS sets a maximum amount you can contribute to a 403(b) each year. For 2024, that limit is $23,500. If you are 50 or older, you can contribute an additional $7,500, for a total of $31,000.
Some people who have worked at the same employer for 15 or more years may be able to contribute even more — up to an extra $3,000 per year. This is called the catch-up provision for long-service employees. Your plan administrator can tell you whether your plan offers this option and whether you may have access to.
These limits change each year based on inflation. Your employer's benefits office or plan provider will tell you the current year's limit when enrollment opens.
Taxes when you retire and start withdrawing
When you withdraw money from your 403(b) in retirement, that money counts as income and you pay federal income tax on it. If you contributed $200,000 over your career and your account grew to $350,000, you pay income tax on every dollar you withdraw.
You do not pay the 10 percent early withdrawal penalty after age 59½, but you still owe income tax. The amount of tax depends on your total income that year and your tax bracket. If you withdraw $40,000 in a year when your other income is low, you may pay less tax than if you withdraw the same amount in a year when you have other income.
Some people roll their 403(b) into an IRA (Individual Retirement Account) when they leave a job or retire. This does not trigger taxes at the time of the rollover, but it gives you more investment choices and potentially lower fees. Your plan provider can explain how to do a rollover if you decide that is right for you.
How a 403(b) differs from other retirement plans
A 403(b) is designed for nonprofit and education employees, while a 401(k) is for private company employees. The contribution limits are the same, but 403(b) plans often have fewer investment options and may charge higher fees because they frequently use annuities.
A 457(b) plan is another option for some government and nonprofit workers. It has similar contribution limits to a 403(b), but the rules about when you can withdraw money are different — you can usually withdraw without penalty once you leave your job, even if you are younger than 59½.
If you work for a school or nonprofit and also have a side business, you might be able to open a Solo 401(k) or SEP IRA for your self-employment income. These have higher contribution limits but are separate from your 403(b).
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 403(b) at work, the amount you can deduct from your taxes for a traditional IRA contribution may be limited depending on your income. Your tax preparer or the IRS website can tell you whether you are affected.
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 a 403(b) at your new employer, or withdraw it (though you will owe taxes and possibly a penalty if you are under 59½). Your old plan provider will send you information about your options.
Does my employer have to offer a 403(b)?
No. Schools and nonprofits are allowed to offer 403(b) plans, but they are not required to. Some employers offer only a pension, others offer both, and some offer neither. Check with your HR department about what retirement plans your employer provides.
Can I withdraw money from my 403(b) if I am having financial trouble?
Some plans allow hardship withdrawals for expenses like medical bills, home repairs, or tuition. The rules vary by plan — yours may not allow them at all. If your plan does, you typically have to show proof of the hardship and that you have no other way to pay. You will still owe income tax on the withdrawal.
What if I do not know who my 403(b) provider is?
Contact your employer's HR or benefits office. They can tell you the name of your provider and give you the phone number or website to log into your account. You should receive statements from your provider at least once a year showing your balance and how your investments have performed.