403(b) Plan: Definition, Example, Explanation

• What is a 403(b) plan?
• 403(b) contribution limits
• How 403(b) plans work 
• How to invest
• How to withdraw
• Pros and cons of 403(b)s
• 401(k) vs. 403(b)
• The financial takeaway

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• A 403(b) plan is a retirement plan for employees of public schools, nonprofits, and religious organizations.
• A 403(b) plan is a tax-deferred option that invests your money in annuities and mutual funds.
• Employers choose how their 403(b) plans are structured and what options employees can pick from.

It can take a lifetime to save up enough money to retire. That's why it's important to know what your employer-sponsored retirement options are as soon as possible.

You may be familiar with 401(k) plans. But if you work in public education or for a nonprofit, cooperative hospital, or religious organization, you likely will have a different retirement option: the 403(b) plan. 

Check out the best retirement plans.

What is a 403(b) plan?

A 403(b) plan is a tax-deferred retirement account that's generally for employees of public education institutions, nonprofits, and some religious organizations. The employer must meet IRS eligibility standards to offer a 403(b) plan to its employees. 

You may be able to contribute a portion of your pre-tax earnings to a 403(b) plan if you work in one of the following sectors:

• Public primary, elementary, or secondary education
• Public colleges or universities
• Public schools run by American Indian tribal governments
• A 501(c)(3) tax-exempt organization
• Cooperative hospital organizations
• A church, synagogue, mosque, temple, or ministry

403(b) contribution limits in 2024 and 2023

For 2024, employees under 50 can contribute up to $23,000. Folks 50 or older can contribute an additional $7,500 catch-up contribution ($30,500 total).

Employees who have been with the same organization for at least 15 years and whose average annual contributions are less than $5,000 per year are eligible to contribute an additional $3,000 per year for up to five years. That means, if you're 50 or older and have had the same employer for 15 or more years, you can contribute up to $33,500 a year for at least five years.

Employee and employer combined contributions in 2024 can be up to $69,000.

In 2023, employees under 50 could contribute up to $22,500 (50 or older could contribute an additional $7,500 for a total of $30,000 total). 

It's important to note that starting in 2026, you'll no longer be able to deposit catch-up contributions to a traditional 401(k) plan if you make over $145,000 annually. Instead, those contributions must be deposited into a Roth 401(k).

Quick tip: The minimum distribution amount from a 403(b) plan is calculated by dividing the account balance from the previous calendar year by a distribution period from the IRS's Uniform Lifetime Table. You can use IRS worksheets to help estimate how much that amount might be for you. 

How 403(b) plans work 

403(b) plans are very similar to 401(k) plans, as they allow you to contribute a certain amount of your pre-tax income to a retirement fund, where it can grow tax-free until you begin to take distributions. 

No two 403(b) plans are the same. Individual employers work with companies that provide and manage 403(b) plans to determine what they want to offer employees. Options could include offering matching funds, the ability to take loans against a balance, and choices about how employees' money is invested. 

Matthew Sanchez, a Certified Financial Planner and wealth advisor at Biechele Royce Advisors says, "Employers typically contribute to these plans, generally, 1%-5% of compensation, much like their for-profit counterparts do."

Most 403(b) plans allow you to make elective deferrals, which is how much of your pay goes into your retirement account. Your employer may choose whether to make its own contributions to your fund. Although employees aren't required to, many added contribution matches as a benefit of employment. 

Quick tip: Ask your employer if they have an after-tax or designated Roth contribution option in their 403(b) plan. This would allow you to add money you have already paid taxes on to your fund. The advantage of this is that since you've already paid taxes on those contributions, they won't be subject to income tax upon withdrawal.  

How to invest in a 403(b)

Your employer determines what kinds of investment choices you have as a 403(b) plan participant. Generally, investment options are more limited compared to other tax-advantaged retirement plans. 

With a 403(b) you can invest in the following options: 

• Mutual funds
• Annuities
• Low-cost bonds
• Stock index funds
• Target-date funds

Kenny Senour, Certified Financial Planner with Legacy Wealth Partners LLC, says that plan sponsors are the ones who determine what features their plans will have and what kind of vesting schedule they will offer. Their employees often can self-direct their plan investments based on a menu of options provided to them. 

"Historically, 403(b) plans' main investment options were annuities," he adds. "That type of option comes with some ugly repercussions in the form of complexity, potential surrender charges, and opportunity cost in the form of meager returns versus a comparable mutual fund. Fortunately, for the sake of simplicity and transparency, many of these plans have moved toward a more 'open architecture' structure, where participants have access to a streamlined investment menu of lower-cost mutual funds."

How to withdraw from a 403(b)

The date you can begin withdrawing money from your 403(b) plan may be determined by your provider. Though the IRS sets the minimum age for penalty-free withdrawal at 59 1/2, your plan might have a different age written into the contract.

If you haven't already started taking withdrawals from your 403(b) plan by the time you're age 72, you are required to start at that time.

Similar to a 401(k), 403(b) plans don't allow you to withdraw money before age 59 1/2. Early withdrawal may result in a penalty fee unless you:

• Are no longer employed with the sponsor of the plan
• Are disabled
• Have died
• Have a financial hardship
• Have a qualified reservist, birth, or adoption distribution 
• Have certain distributions of lifetime income investments

If you withdraw funds too early and don't qualify for the above exceptions, you'll be charged a 10% penalty fee of the amount withdrawn. For example, if you're younger than your plan's minimum and want to take $10,000 out of your 403(b) account to pay for home repairs, you'd have to pay income tax on that amount — plus an extra $1,000 as a penalty ($10,000 x 0.10 = $1,000). 

However, if you took that money from your plan as a loan, you wouldn't have to pay taxes or penalties on it. But you'd still have to pay the money back and may have some interest applied, as well.  

"The types of withdrawals available to employees in retirement are plan specific," Senour says. "But, typically, employees have the option to rollover their account to another qualified retirement account, take a lump sum distribution, or set up 'installment payments' on a monthly or quarterly basis."

Any withdrawal is considered taxable income for the year in which it is received, except for money that was originally contributed to the account after taxes were paid. According to the IRS, if you don't take at least the minimum amount required from your account, "you are subject to a nondeductible 50 percent excise tax on the difference between the required minimum distribution and the amount actually distributed."

Read our Retirement Calculator

Pros and cons of a 403(b) plan

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

The 401(k) is the retirement fund option most private employers offer and is often more recognized than the 403(b). They are very similar in many ways, but there are some important differences you'll want to know about.

401(k)s

• Available to employees of private, for-profit companies
• Administered by large financial services firms
• Follows the Employee Retirement Income Security Act (ERISA)
• Any investment option permitted by the plan provider
• Doesn't offer bonus catch-up contribution
• The 2023 contribution limit is $22,500 (additional catch-up contribution of $7,500 for folks over 50)

403(b)s

• Available to employees of non-profit organizations and government entities
• Administered by insurance companies
• Doesn't have to apply to ERISA regulations
• Only offer mutual funds and annuities
• Offers a $3,000 catch-up bonus after 15 years with an employer
• The 2023 contribution limit is $22,500 (additional catch-up contribution of $7,500 for folks over 50)

Check out Insider's guide on how to maximize your 401(k)

Should you invest in a 403(b) plan?

The 403(b) is the standard for employer-sponsored retirement savings in the nonprofit and public education sector. If you work in any of these eligible industries and want to plan for retirement, you'll want to speak with your employer about what 403(b) options are offered. They are the ones who determine the details of what's available to you through a company 403(b) plan, what rules apply, and when you can participate. 

Once you have that information, consult with a financial advisor to determine how you can best use the plan to achieve your retirement goals.

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