What a 403(b) plan is and who can use one

A 403(b) plan is a retirement savings account offered by schools, hospitals, nonprofits, and some government agencies. It works like a 401(k) but is designed specifically for employees of tax-exempt organizations. You contribute money from your paycheck before taxes are taken out, and that money grows tax-deferred until you withdraw it in retirement.

If you work full-time or part-time for a public school, a college, a nonprofit hospital, a religious organization, or certain government agencies, your employer may offer a 403(b) plan. Not all tax-exempt employers offer one, so you will need to check with your human resources or benefits department to see whether your workplace has a plan available.

The main appeal of a 403(b) is that it reduces your taxable income now and lets your savings compound without annual tax bills. You only pay taxes when you take the money out, usually after age 59½.

Key Takeaways

  • A 403(b) plan lets you save for retirement through payroll deductions, and the money you contribute lowers your taxable income for the year.
  • Your employer does not have to match your contributions, though some do — check your plan documents to see what your workplace offers.
  • You choose how much to contribute each pay period, up to an annual limit set by the IRS (the limit changes yearly and is higher if you have worked at your employer for 15 years or more).
  • You select the investments where your money goes — usually mutual funds or annuities — and you can change your choice once per year or when your life changes.
  • If you leave your job, you can roll your 403(b) balance into an IRA or another employer plan to keep it growing tax-deferred.

How contribution limits work

The IRS sets an annual limit on how much you can contribute to a 403(b) plan. For 2024, that limit is $23,500 if you are under age 50. If you are 50 or older, you can contribute an additional $7,500 as a "catch-up" contribution, bringing your total to $31,000. These limits change each year, so check with your benefits office or the IRS website for the current year's amount.

Some 403(b) plans also allow a special "15-year service" catch-up if you have worked at the same employer for at least 15 years. This can let you contribute an extra $3,000 per year (up to a lifetime total of $15,000 extra), but only if your plan document includes this feature. Ask your benefits office whether your plan allows it.

Your employer may also contribute to your account through a matching program or profit-sharing arrangement. This is separate from your own contributions and does not count toward your personal limit. If your employer offers a match, that is information programs — contribute enough to get the full match if you can.

Choosing your investments

When you open a 403(b), you do not just put money in a single account. You choose where that money goes by selecting from a list of investment options your plan offers. Most plans offer mutual funds, target-date funds (which automatically shift from stocks to bonds as you near retirement), or annuities (insurance products that may provide a certain income in retirement).

Your plan administrator will provide a list of available investments along with descriptions and past performance. Read the expense ratios — the annual fees charged by each fund — because high fees eat into your returns over time. Target-date funds are a straightforward choice if you do not want to pick individual investments; you just select the fund closest to your expected retirement year, and it rebalances itself automatically.

You can usually change your investment selections once per year, or whenever you have a major life change like marriage, divorce, or a significant change in income. Some plans allow more frequent changes. Check your plan's rules or ask your benefits office.

How to enroll in your employer's plan

Start by contacting your human resources or benefits department and asking for the 403(b) plan documents and enrollment materials. They will give you a summary of the plan, a list of investment options, and an enrollment form (often called a salary reduction agreement or deferral election form).

On the enrollment form, you will specify how much of each paycheck you want to contribute — usually as a dollar amount or a percentage of your salary. For example, you might choose to contribute $500 per paycheck or 10% of your gross pay. The form will also ask you to choose your investments from the available options.

Once you submit the form, your employer's payroll department will begin deducting your contributions from your next paycheck and sending them to the investment provider. You will receive statements showing your balance and how your investments are performing, usually quarterly or online through a portal.

What happens when you leave your job

If you change jobs, you have several options for 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), though you will no longer be able to contribute. You can roll the balance into an Individual Retirement Account (IRA), which gives you more investment choices and often lower fees. You can also roll it into your new employer's 401(k) or 403(b) plan if that plan accepts rollovers.

Do not withdraw the money and take it as a check, because you will owe income taxes on the entire amount plus a 10% penalty if you are under age 59½. A direct rollover — where the money moves straight from one account to another without you touching it — avoids taxes and penalties.

Contact your plan administrator before you leave your job to understand your options and start the rollover process if you choose to move the money.

Understanding vesting and employer contributions

Money you contribute yourself is always yours when ready — there is no waiting period. However, if your employer makes matching or profit-sharing contributions, those funds may be subject to a vesting schedule. Vesting means you own a percentage of the employer's contribution after you have worked there for a certain length of time.

For example, your plan might have a three-year vesting schedule, meaning you own 0% of employer contributions in year one, 50% in year two, and 100% in year three. If you leave before you are fully vested, you forfeit the unvested portion. Your plan documents will spell out the exact vesting schedule, or you can ask your benefits office.

This is one reason to understand your employer's contribution terms before you leave a job — you may want to stay long enough to become fully vested and claim the full employer match.

Withdrawals and loans before retirement

Generally, you cannot withdraw money from a 403(b) before age 59½ without paying a 10% early withdrawal penalty plus income taxes on the amount withdrawn. However, there are some exceptions: you can withdraw money penalty-free if you have a may have access to hardship (such as medical expenses, home purchase, or education costs), though you will still owe income tax. Some plans also allow loans, where you borrow against your own balance and repay it with interest.

Hardship withdrawals and loans have strict rules and require documentation. If you think you need to access your money before retirement, contact your plan administrator to learn what your specific plan allows and what paperwork you will need.

In most cases, it is better to leave the money alone and let it grow. Early withdrawals shrink your retirement savings and trigger taxes and penalties that reduce the amount you actually receive.

Frequently Asked Questions

Can my employer change the 403(b) plan or take away my money?

Your employer can change the plan rules, investment options, or even the plan provider, but they cannot take away money you have already contributed. Your balance is always yours. Changes to the plan typically affect future contributions or investment choices, not your existing account balance.

What is the difference between a 403(b) and a 401(k)?

Both are employer-sponsored retirement plans with similar contribution limits and tax treatment. The main difference is who offers them: 401(k)s are for for-profit companies, while 403(b)s are for nonprofits, schools, and government agencies. Some 403(b) plans have slightly different rules around loans and hardship withdrawals.

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

No, participation is voluntary. However, if your employer offers a match, you are leaving information programs on the table by not contributing. At minimum, contribute enough to get the full employer match if one is available.

Can I have both a 403(b) and an IRA?

Yes. You can contribute to both in the same year, but your combined contributions to all retirement accounts may be limited by IRS rules. The 403(b) limit and IRA limit are separate, so you could contribute the maximum to each, though income limits explore to IRA tax deductions if you have a 403(b) at work.

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

Your 403(b) balance goes to whoever you named as your beneficiary on the plan documents. If you did not name a beneficiary, the money goes to your estate. Review your beneficiary designation when you enroll and update it if your circumstances change, such as after marriage or divorce.