403(b) Plans

403(b) Plan Overview

403(b) plans, named for a section of the tax code, are available for public schools, colleges and universities, certain nonprofit organizations and churches to offer their employees. Also known as tax-sheltered annuities, or TSAs, they have many similarities with private sector 401(k) plans. 

Nonprofit sector employees contribute part of their salary to a 403(b) account and their employer may also make contributions. However, matching is far less common for 403(b)s than 401(k)s, especially in K-12 public schools and other workplaces that are funded with taxpayer dollars. 

403(b) plan participants select investments available through vendors their employer selects. Unlike 401(k)s which may offer multiple investments, 403(b) choices are limited to annuities and mutual funds. 

The number of plan vendors and investment options offered to 403(b) plan participants varies among employers.

Key Facts About 403(b) Plans

Contribution Rules

For 403(b) plans, the contribution limit is $23,000 in 2024. Employees age 50 and older can contribute an additional $7,500 for a total of $30,500. These contributions are deducted from employees’ paychecks, and for tax-deferred traditional 403(b) plans, they also lower yearly income tax bills.

Contributions can be before tax with a traditional 403(b) or after tax with a Roth 403(b). Either way, plan participants are spared paying capital gains tax while their money grows. 

Distribution Rules

Plan participants can start making penalty-free withdrawals at age 59 ½. 

If you withdraw funds from a retirement account before you reach the age of 59 ½, you may incur a 10% penalty from the IRS, unless you have a qualifying life event, such as a disability or medical emergency.

RMDs must begin at age 73, if born between 1951 and 1959, or age 75, if born in 1960 or later. Older retirees already started RMDs at either age 70 ½ or 72.

403(b) Catch-Up Rule

403(b) plans have a unique catch-up savings rule not found in other employer retirement savings plans. Employees of any age who have worked for the same employer for at least 15 years can contribute an additional $3,000 a year in catch-up savings, up to a total of $15,000, if their plan permits. This is in addition to the catch-up contribution that the IRS allows, which is $7,500 in 2024.

Types of 403(b) Plans

Nonprofit organization employees may have access to traditional and Roth 403(b) plans.

Traditional 403(b)

Traditional 403(b) plans are funded with pre-tax dollars that provide an upfront tax write-off for the tax year deposits are made. Withdrawals are taxed as ordinary income. The “still working exception” for the current employer 403(b) plan of older workers past the beginning age for required minimum distributions (RMDs) allows them to delay RMDs until April 1 following the year of retirement.

Roth 403(b)

Roth 403(b) plans are funded with money that has already been taxed. There is no up-front tax write-off but distributions are not taxed so long as they meet the criteria for qualified distributions. Withdrawals are “qualified” if the participant is at least 59 ½ and has held the account for at least five years. Distributions are also tax-free in the event of disability or death.

Who Is Eligible for 403(b) Plans?

The following employees are eligible to participate in 403(b) plans:

• Employees of tax-exempt 501(c)(3) organizations
• Employees of cooperative hospital service organizations
• Public school employees (teachers, administrators and staff) 
• Civilian faculty and staff of the Uniformed Services University of the Health Sciences
• Ministers employed by 501(c)(3) organizations
• Self-employed ministers
• Ministers or chaplains employed by a non-501(c)(3) organization but who function as ministers in their daily professional responsibilities with their employers

Pros and Cons of 403(b) Plans

403(b) plans have advantages and disadvantages. Understanding them can help with financial decision-making.

Pros of 403(b) Plans

• Tax-deferred savings with traditional 403(b)s and tax-free withdrawals from Roth 403(b)s
• Employer handles most of the paperwork
• High annual contribution limits versus individual retirement accounts (IRAs)
• Traditional 403(b) contributions lower taxable income 
• Higher catch-up contribution limits if you’ve worked at the same organization for 15 years or more

Cons of 403(b) Plans

• Limited selection of investment products versus IRAs
• Many 403(b) plan vendors only offer expensive, commission-based investment products 
• Many 403(b) plans are exempt from Employee Retirement Income Security Act (ERISA) rules
• 10% IRS penalty on money withdrawn before age 59 ½ 
• Fewer employers offer contribution matches for 403(b) plans than 401(k) plans

Make sure to evaluate annual fees and costs associated with your 403(b) plan carefully before signing up. There are tools and resources available to help you find quality vendors.

403(b) Plans vs. 401(k) Plans

403(b) plans are similar to 401(k) plans. Both are offered by employers, funded through payroll deduction, offer employees a specific “menu” of investment options and allow employers to make contributions to employee accounts. However, they have a few key differences. 

Key Differences Between 403(b) Plans and 401(k) Plans

• 403(b)s are offered by certain government, nonprofit and religious organizations while 401(k)s are offered by for-profit companies.
• 403(b)s offer a $3,000 a year catch-up contribution option and 401(k)s do not.
• 403(b)s tend to be administered by insurance companies, while most 401(k)s are administered by mutual fund companies.
• 403(b) plans more often feature annuities than 401(k) plans.

Whatever route you choose, consult a trusted financial advisor before making a decision to ensure you understand your options.

Editor Bianca Dagostino contributed to this article.