A 403(b) is a retirement savings account for nonprofit and public school employees

A 403(b) account is a tax-deferred retirement plan offered by nonprofits, public schools, colleges, and some government employers. Money you put in reduces your taxable income for that year, and you do not pay taxes on the growth until you withdraw it in retirement. It works similarly to a 401(k), but with different rules about who can offer it and how much you can contribute.

The account is named after the section of the tax code that created it. If you work for a hospital, university, public school, or registered charity, your employer may offer a 403(b) as part of your benefits package. You contribute through payroll deduction, and your employer may match part of what you contribute.

Key Takeaways

  • A 403(b) is only available through employers in the nonprofit, education, and public sectors — you cannot open one on your own.
  • Money you contribute comes out of your paycheck before taxes, lowering your taxable income in the year you contribute.
  • You can withdraw money penalty-free starting at age 59½; withdrawals before that age usually trigger a 10 percent early withdrawal penalty plus income tax.
  • Your employer may match a portion of your contributions, which is assistance programs added to your account.
  • Annual contribution limits are set by the IRS and change each year; for 2024, the limit is $23,500 for most employees.

How contributions and employer matching work

You decide what percentage of your paycheck to contribute to your 403(b), up to the annual IRS limit. That amount is deducted before income tax is calculated, so if you earn $50,000 and contribute $5,000, you only pay income tax on $45,000. Your employer then processes the contribution and sends it to the investment company managing your account.

Many employers offer a match — typically 3 to 6 percent of your salary. If your employer matches 5 percent and you contribute 5 percent, they add an amount equal to 5 percent of your salary to your account. If you contribute less than their match threshold, you receive only what you contribute. If you contribute more, you still only receive the match amount. This is immediate money added to your retirement savings, so contributing enough to capture the full match is usually worth doing.

Some employers offer no match at all. Check your employee handbook or ask your HR department what your employer's match policy is, if any.

Investment options and how your money grows

Unlike a savings account, the money in a 403(b) is invested — typically in mutual funds or annuities chosen by your employer's plan. You usually select from a menu of investment options, ranging from conservative (bonds, stable value funds) to aggressive (stock-heavy funds). Your choice affects how fast your money grows and how much it can fluctuate in value.

The growth is tax-deferred, meaning you do not pay taxes on dividends, interest, or capital gains while the money sits in the account. You only pay taxes when you withdraw. This allows your money to compound faster than it would in a regular taxable account, because taxes are not taken out each year.

If you are unsure which investments to choose, your employer's plan may offer a target-date fund — a single fund that automatically adjusts from aggressive to conservative as you approach retirement. This removes the need to rebalance manually.

Withdrawal rules and early withdrawal penalties

You can withdraw money from your 403(b) penalty-free starting at age 59½. Withdrawals before that age are subject to a 10 percent early withdrawal penalty on top of regular income tax. For example, if you withdraw $10,000 at age 45, you owe income tax on the full $10,000 plus a $1,000 penalty.

Some plans allow hardship withdrawals for specific situations — medical bills, home purchase, or education expenses — without the 10 percent penalty, though you still owe income tax. Rules vary by plan, so contact your plan administrator to learn what qualifies.

You must begin taking withdrawals by April 1 of the year after you turn 73 (this age changed under recent tax law). These are called required minimum distributions (RMDs), and the IRS calculates how much you must withdraw each year based on your age and account balance. If you do not take the full amount, you face a penalty.

The difference between a 403(b) and a 401(k)

Both are employer-sponsored retirement plans with the same annual contribution limits and early withdrawal penalties. The main differences are who offers them and how they are regulated. A 401(k) is offered by for-profit companies; a 403(b) is offered by nonprofits and public employers. A 403(b) historically had fewer investment options and less regulation, though that gap has narrowed in recent years.

If you work for a nonprofit or public employer, you will be offered a 403(b), not a 401(k). If you work for a for-profit company, you will be offered a 401(k). The contribution limits, tax treatment, and withdrawal rules are nearly identical.

What happens to your 403(b) if you change jobs

When you leave your job, your 403(b) stays with you — your employer does not take it back. You have several options: leave the money in the plan if your balance is above a certain threshold (usually $5,000), roll it into an IRA, or roll it into a 403(b) at your new employer if they offer one.

A rollover moves the money from one account to another without triggering taxes or penalties, as long as you follow the rules. If you withdraw the money yourself and do not roll it over within 60 days, the full amount becomes taxable income and you owe the 10 percent early withdrawal penalty if you are under 59½.

Many people roll a 403(b) into a traditional IRA because IRAs often offer more investment choices and lower fees. Talk to a tax professional or financial advisor before rolling over, because the rules can be complex depending on whether your 403(b) contains employer contributions, employee contributions, or both.

Fees and how they affect your balance

Your 403(b) plan charges fees — some visible, some not. Investment fees (called expense ratios) are built into the mutual funds or annuities you choose and range from 0.1 percent to 1 percent or more per year. Administrative fees cover the cost of running the plan and may be charged as a flat dollar amount or a percentage of your balance.

Over decades, even small fee differences compound significantly. A 0.5 percent annual fee on a $100,000 balance costs $500 per year; a 1.5 percent fee costs $1,500. Ask your HR department for a fee disclosure document (called a "404(a)(5) notice") that lists all fees in your plan. If fees seem high, ask whether your employer offers lower-cost investment options or whether you can roll the money to an IRA with lower fees.

Frequently Asked Questions

Can I contribute to a 403(b) and an IRA in the same year?

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) through your employer, your ability to deduct IRA contributions may be limited depending on your income. Consult a tax professional about your specific situation.

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

You can open a traditional or Roth IRA on your own through a bank or brokerage. IRAs have lower annual contribution limits than 403(b)s, but you control the investments and fees. Some nonprofits offer a SIMPLE IRA instead of a 403(b), which has similar tax benefits but different rules.

Can I borrow money from my 403(b)?

Some plans allow loans, but not all. If your plan permits it, you can usually borrow up to 50 percent of your balance, up to $50,000. You repay the loan through payroll deduction with interest. If you leave your job, the loan must usually be repaid within 60 days or it becomes a taxable withdrawal. Check your plan documents to see if loans are available.

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

Your beneficiary — the person you named when you opened the account — inherits the balance. They can roll it into their own IRA or take distributions over time. If you did not name a beneficiary, the money goes through your estate, which can be slower and more complicated. Review your beneficiary designation every few years, especially after major life changes.

Do I pay taxes on my 403(b) contributions?

No, not in the year you contribute. Your contributions reduce your taxable income for that year. You pay income tax when you withdraw the money in retirement. This is why it is called "tax-deferred" — the tax is delayed, not eliminated.