Takeaways
- 403(b) plans are retirement savings plans for public schools, universities, and nonprofits.
- 403(b) contributions are made from regular payroll deductions for retirement.
- 403(b) investment options tend to be limited to mutual funds and annuities.
- Mapping contributions to a 403(b) plan should be part of your retirement planning.
- For the tax year 2025, the annual 403(b) contribution limit is $23,500 and, for qualifying employees, an additional catch-up contribution of $7,500.
What Is a 403(b) Plan?
403(b) plans are sometimes referred to as tax-sheltered annuity plans. They are retirement savings choices available to employees of public schools, some nonprofit organizations, and ministers. The 403(b) plan lets you save a portion of your income in a specific retirement account, where it can grow tax-deferred until you withdraw it in retirement.
Our Picks: Best Online Brokerage Accounts
Unlike the more popular and far more well-known 401(k) plans offered by employers in the private sector, 403(b) plans are created specifically to meet the needs of employees in public schools and nonprofit organizations.
You can participate in a 403(b) plan if you work for:
- Nonprofit Organizations
- Public Universities
- State Colleges
- Ministers and clergy
- Churches
One of the biggest benefits of a 403(b) plan is the significant tax benefits. Your contributions are made from pre-tax dollars, meaning that you are simultaneously saving more of the money you make and lowering your taxable income.
Read More: 10 Investment Strategies for Beginners
In addition to the tax benefits, many 403(b) plans offer a select group of investment options, including mutual funds and annuities. Investments like these let you customize your investment approach to align with your personal investment risk tolerance. Also, similarly to other retirement plans, a 403(b) plan may feature employer contributions, boosting retirement savings even more.
Whether you are working with a financial advisor to map your investing strategies or doing it yourself, understanding what a 403(b) plan offers is critical to a successful financial planning session. Now that you are familiar with 403(b) plans let’s dive into how they work.
Take the Next Step:
Acorns Website
Acorns Investing App
Smart Money Rating: 5/5
Intro Offer: $20 Bonus Investment
Best For: Beginner Investors
Annual Fee: N/A
How 403(b) Plans Work
A 403(b) plan is a retirement savings account that allows you to contribute a portion of your income toward your retirement nest egg. Generally, employees of public school systems, some non-profits, as well as ministers, are eligible participants in a 403(b) plan.
2 Main Types of 403(b) Plans
There are two main types of 403(b) plans offered to employees. Depending on your employer, you may have access to one or both types of plans. Here are the two categories:
- Traditional 403(b) Plan: Contributions made to a traditional 403(b) plan are with pre-tax income. Taxes on investment gains are paid when you withdraw funds from your brokerage account during retirement.
- Roth 403(b) Plan: Contributions made to a traditional 403(b) plan are with post-taxed income. Since you are contributing income that has already been taxed, investment gains from a Roth 403(b) plan are not taxed upon withdrawal during retirement.
Contributions are voluntary, so you choose whether you want to save a portion of your paycheck. A pre-tax portion of your paycheck is deposited into your 403(b) account if you elect to contribute. Your contributions are tax-deductible, which means when you file your taxes, you get to deduct your 403(b) plan contributions from your taxable income. These deductions lower your overall taxable income and can lower your tax bracket.
Related: 2024-2025 Income Tax Rates and Brackets
Once you have contributed to your 403(b) plan, the next step is to remember to invest those funds. You will have many options for how to invest your contributions. Common choices include mutual funds or other managed funds, which allow you to invest in a predetermined mix of stocks, bonds, or other securities, and annuities, which can provide an additional income stream in retirement. When choosing your investment allocation, remember to ensure your choices align with your personal risk tolerance and long-term financial goals.
Once you start approaching retirement age, you can take distributions without penalty. You can do this at age 59 ½, when you retire, or experience one of a few qualifying hardships. Withdrawals from your 403(b) will be taxed as ordinary income, while a Roth 403(b) can offer tax-free withdrawals in some situations.[1]
Finally, some 403(b) plans will let you take out a loan from the account or make hardship withdrawals if you meet specific requirements. However, ensure you understand the rules and possible consequences of those withdrawals, like additional taxes or other penalties.
You Might Also Like:
Take the Next Step:
403(b) Contribution Limits for 2024 and 2025
There are contribution limits in place with 403(b) plans, like any other conventional retirement plan. These limits help foster consistent savings for eligible employees. Being clear on the limits is critical for maximizing your contributions.
The 2025 base contribution limit for 403(b) plans is $23,500. This means you can contribute up to $23,500 in pre-tax income to your 403(b) plan for the tax year 2025. This limit will apply to all contributions other than catch-up contributions, including employer contributions or matching.
| Contribution Type | 2024 | 2025 |
|---|---|---|
| Pretax & Roth employee contributions | $23,000 | $23,500 |
| Employee + employer contributions | $69,000 | $70,000 |
| Catch-up contributions | $7,500 (50+) | $7,500 (50-59 or 64+) $11,250 (60-63) |
Source: Internal Revenue Service[2]
Related: Retirement 101: How to Start Saving for Retirement
Those who are 50 or older by the end of 2025 will be eligible for an additional contribution amount, referred to as a catch-up contribution. Catch-up contributions can be as much as $7,500 in 2025, which means if you are 50 or older, you can make up to $31,000 in contributions of pre-tax income.
Additionally, there is a cap on the total contributions to a 403(b) plan. This cap includes all contributions, and for 403(b) in 2025, the limit is the lesser of either $70,000 or 100% of all includible compensation for the most recent year of service.
What Is a 403(b) Catch-Up Deferral?
In addition to the standard contribution, and age-based catch-up contributions, 403(b) plans offer unique catch-up deferral opportunities for employees with significant service. This special catch-up provision allows you to boost your contributions beyond the typical limits, opening the door to increased savings.
To qualify for the special 403(b) catch-up, you must have completed at least 15 years of service to the public school system, hospital, home health agency, welfare agency, or church. This stipulation is crafted for those who have devoted large segments of their careers to these organizations.
Related: 10 Best Ways to Invest $1,000
If you meet certain conditions, the 403(b) special catch-up will let you contribute an additional amount equal to the lesser of:
- $3,000
- $15,000, reduced by the amount of additional elective deferrals made in prior years because of this rule.
- $5,000 times the number of the employee’s years of service for the organization, minus the total elective deferrals made for earlier years.
Get Smart With Your Money
Fresh weekly articles delivered straight to your inbox.
Enter your name and email for free tips and tricks.
403(b) Plan vs. 401(k) Plan
Selecting the best retirement plan can make the difference between a comfortable retirement and struggling to enjoy retirement. We will start by analyzing the differences between a 403(b) and a 401(k).
The first difference is in the type of employer that provides the plan. 403(b) plans are typically offered by public schools. universities, some 501(c)(3) nonprofit organizations, and religious organizations. On the other hand, employees in the private sector receive access to 401(k) plans.
Another notable difference is in the investment options available to you. A 403(b) offers some great flexibility, but not in investment options. Unfortunately, they are usually limited to mutual funds and annuities. 401(k) plans offer a more robust investment buffet of ETFs and target-date funds. 401(k) plans will generally let you invest in most assets and securities found on the market.
Read More: How to Boost Your Net Worth
The fee structure of the two plans will also be relatively different. In general, 403(b) plans tend to have higher administrative fees if they invest in annuities.[3] 401(k) plans will also carry some fees, though they depend heavily on the plan administrator and the employer’s preferences.
Finally, matching contributions, while possible in both 403(b) plans and 401(k) plans, is far more common in the 401(k) plans. This additional contribution can be a potent incentive for employees to contribute.
403(b) Plan vs. 457(b) Plan
There are many retirement plans and programs to choose from. If you work in public education or government, you may need to decide between a 403(b) and 457(b) plan.
The most notable difference between the two plans is the rules regarding withdrawals. 403(b) plans will generally impose a 10% penalty on withdrawals made before 59 ½ if you have not left the job or qualified for a hardship. 457(b) plans typically let you withdraw with no penalty once you have officially left your job, no matter your age. Most people enjoy the flexibility of 457(b) plans because if you want to retire early or end up changing jobs, you can access your funds.
Smart Summary
Planning for retirement is a smart money move. If you work for a public university, state college, or nonprofit that offers access to a 403(b) plan, consider whether you should be making contributions. Increasing your retirement savings with a 403(b) plan will boost your net worth and should be an essential part of your financial planning process. If you don’t know where to start, learn more about basic investing strategies now.
You Might Also Like:
(1) Internal Revenue Service. IRC 403(b) Tax-Sheltered Annuity Plans. Last Accessed January 19, 2025.
(2) Internal Revenue Service. Retirement Topics – 403(b) Contribution Limits. Last Accessed January 19, 2025.
(3) Government Accountability Office. Defined Contribution Plans: 403(b) Investment Options, Fees, and Other Characteristics Varied. Last Accessed January 19, 2025
