A 403(b) is a retirement savings plan for people who work at nonprofits, schools, and certain government agencies

A 403(b) plan is a tax-deferred retirement account available to employees of tax-exempt organizations — mainly public schools, colleges, hospitals, and nonprofits. You contribute money from your paycheck before taxes are taken out, which lowers your taxable income for the year. The money grows without being taxed until you withdraw it in retirement, usually after age 59½.

The main difference between a 403(b) and a 401(k) is who offers it. A 401(k) is for for-profit companies. A 403(b) is for the nonprofit and education sector. The rules are similar, but a 403(b) has some unique features — particularly the ability to make "catch-up" contributions if you've worked at the same employer for 15 years or more.

Your employer does not have to match your contributions, though some do. Whether your workplace offers a match depends entirely on your employer's plan design. Many schools and nonprofits offer no match at all, while others match a percentage of what you contribute.

Key Takeaways

  • You contribute to a 403(b) through payroll deduction, and the money is not taxed until you withdraw it after retirement.
  • Your employer must offer a 403(b) plan for you to have one — you cannot open one on your own.
  • Contribution limits for 2024 are $23,500 per year, with an additional $7,500 catch-up if you are age 50 or older.
  • A 403(b) is invested in annuities or mutual funds, and your investment choices depend on what your employer's plan offers.
  • If you leave your job, you can roll your 403(b) balance into an IRA or another employer's retirement plan to avoid taxes and penalties.

How much you can contribute each year

For 2024, you can contribute up to $23,500 of your salary to a 403(b) plan. This is called the annual contribution limit. If you are age 50 or older, you can add an extra $7,500 per year, bringing your total to $31,000. These limits change each year, so check with your plan administrator or the IRS website if you are planning for a future year.

Your employer may also set a lower limit than the IRS allows. Some nonprofits and schools restrict contributions based on salary percentage or other rules. Check your plan documents or ask your human resources department what your specific limit is.

If you have worked at the same employer for 15 years or more, you may be able to make an additional 15-year catch-up contribution of up to $3,000 per year (lifetime maximum of $15,000). This is a unique feature of 403(b) plans and does not explore to 401(k)s. Your plan must allow this option, so confirm with your employer before counting on it.

Investment options in a 403(b)

A 403(b) is typically invested in one of two ways: annuities or mutual funds. An annuity is a contract with an insurance company that promises to pay you a set amount in retirement. A mutual fund is a pool of stocks or bonds managed by an investment company. Which option you have depends on what your employer's plan offers.

Your employer chooses which investment providers are available to you. You do not get to pick any provider you want — you can only invest through the vendors your plan has contracted with. This is different from an IRA, where you can open an account at almost any bank or brokerage. Ask your HR department for a list of the investment options available in your plan.

Some plans offer only a handful of choices, while others offer dozens. If your plan's options are limited or expensive, you may want to maximize contributions to an IRA as well, which gives you more control over where your money is invested.

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

When you leave your job, you have several choices for what to do with your 403(b) balance. You can leave the money in your former employer's plan if the balance is above a certain amount (usually $5,000). You can roll it into an IRA (Individual Retirement Account), which gives you more investment choices and often lower fees. You can roll it into your new employer's retirement plan if that employer offers one and accepts rollovers. Or you can cash it out, though this triggers taxes and a 10% penalty if you are under 59½.

A rollover is a direct transfer of money from one retirement account to another without you touching the funds. This avoids taxes and penalties. If you take a check and deposit it yourself, you have 60 days to complete the deposit or the IRS treats it as a withdrawal, which means you owe taxes and penalties on the full amount.

The best choice depends on your situation. If your new job offers a 401(k) or 403(b), rolling over keeps your retirement savings in one place. If you want more investment control and lower fees, rolling into an IRA is often the better move. Talk to a tax professional or financial advisor before making this decision, especially if your balance is large.

Taxes and withdrawals before retirement

You do not pay income tax on the money you contribute to a 403(b) or on the growth while it sits in the account. You pay tax only when you withdraw the money. This is why it is called tax-deferred — the tax is delayed until later.

If you withdraw money before age 59½, you owe income tax on the withdrawal plus a 10% penalty. There are a few exceptions: if you are no longer employed at that company and you are age 55 or older, you can withdraw without the penalty (though you still owe income tax). If you have a financial hardship, some plans allow hardship withdrawals, but these are rare and your plan must offer them. If you are disabled or have significant medical expenses, other exceptions may explore.

At age 73, you must start taking Required Minimum Distributions (RMDs) from your 403(b). This means you have to withdraw a certain amount each year, whether you need the money or not. The amount is calculated based on your age and account balance. If you do not take your RMD, the IRS charges a penalty equal to 25% of the amount you should have withdrawn (reduced to 10% if you correct it within two years).

Employer matching and vesting

Some employers offer matching contributions — they add money to your 403(b) based on how much you contribute. For example, an employer might match 50% of what you contribute, up to 3% of your salary. This is information programs, but it only goes into your account if you contribute enough to earn it.

When an employer contributes money to your account, that money is subject to a vesting schedule. Vesting means you own the money outright. Your own contributions are always 100% vested when ready — they belong to you. But employer contributions may have a waiting period. For example, your employer might require you to work there for three years before you own the employer's contributions. If you leave before you are fully vested, you forfeit the unvested portion.

Check your plan documents to see if your employer offers matching and what the vesting schedule is. If you are thinking about leaving your job, knowing your vesting date can help you decide whether to stay a bit longer to claim the employer's contributions.

How a 403(b) differs from other retirement plans

A 403(b) is similar to a 401(k) in many ways — both are employer-sponsored, both are tax-deferred, and both have the same annual contribution limits. The main differences are who can have them and what investments are available. A 403(b) is only for nonprofits and schools. A 401(k) is only for for-profit companies. A 403(b) traditionally used annuities, while a 401(k) uses mutual funds, though this distinction is blurring as more 403(b) plans now offer mutual funds.

An IRA is different because it is not tied to your employer. You open an IRA on your own at a bank or brokerage. You can contribute up to $7,000 per year (or $8,000 if you are 50 or older). An IRA gives you more investment choices than a 403(b), but the contribution limit is much lower. Many people use both — they contribute to their employer's 403(b) up to the match, then max out an IRA, then put any remaining savings back into the 403(b).

A 457(b) plan is another tax-deferred plan for certain government employees. The rules are similar to a 403(b), but 457(b) plans have different withdrawal rules and do not have the 15-year catch-up option.

Common mistakes to avoid

One mistake is not contributing enough to capture an employer match. If your employer matches contributions and you do not contribute, you are leaving information programs on the table. Even if you are tight on cash, contributing enough to get the full match is usually worth it.

Another mistake is cashing out your 403(b) when you leave your job. Many people do this because they need the money or do not understand the tax consequences. Cashing out triggers income tax plus a 10% penalty, which can eat up 30% to 40% of your balance. A rollover to an IRA preserves the money and keeps it growing for retirement.

A third mistake is not reviewing your investment choices. If your plan offers mutual funds, check the expense ratios — how much you pay in fees each year. High fees can cost you tens of thousands of dollars over a career. If your plan's options are expensive, you may want to contribute less to the 403(b) and more to an IRA, where you have better choices.

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 you have a 403(b) at work, there are income limits on whether you can deduct contributions to a traditional IRA. A Roth IRA has different rules. Talk to a tax professional about your specific situation.

What happens to my 403(b) if I die?

Your 403(b) balance goes to whoever you named as your beneficiary. If you did not name a beneficiary, it goes to your estate and may go through probate. Review your beneficiary designation every few years, especially after major life changes like marriage or divorce.

Can my employer take money out of my 403(b) for any reason?

No. Your employer cannot take your contributions or the growth. However, if you owe back taxes or have unpaid child support, the government can garnish your account. Your employer can also deduct unpaid loans from your 403(b) if your plan allows loans and you default.

Is there a way to access my 403(b) money before 59½ without a penalty?

The main exception is the "rule of 55" — if you leave your job at age 55 or later, you can withdraw without the 10% penalty (though you still owe income tax). Some plans also allow hardship withdrawals for specific situations like medical bills or foreclosure, but these are uncommon and your plan must offer them.

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

You can open an IRA on your own. A traditional IRA or Roth IRA gives you tax-advantaged retirement savings even without an employer plan. The contribution limit is lower than a 403(b), but you have full control over your investments and can open an account at almost any bank or brokerage.