A 403(b) is a retirement savings plan for employees of schools, nonprofits, and certain government agencies

A 403(b) plan is a tax-deferred retirement account offered by employers in the nonprofit, education, and public sector. The name comes from the section of the tax code that created it. Unlike a traditional pension where your employer pays you a set amount after you retire, a 403(b) works like a savings account: you and your employer contribute money during your working years, and you decide how to invest it. When you retire, you receive the balance you've built up.

The main difference between a 403(b) and a pension is control and risk. With a pension, your employer guarantees a specific monthly payment for life, regardless of how the investments perform. With a 403(b), the amount you receive depends on how much you and your employer contributed and how well those investments grew. You bear the investment risk, but you also have more control over where your money goes.

403(b) plans are common in schools, universities, hospitals, religious organizations, and nonprofits. If you work for a public school system, a private college, or a large charity, your employer likely offers one. Some government employees also have access to 403(b) plans, though many public employees use a different plan called a 457(b) instead.

Key Takeaways

  • A 403(b) is a retirement savings plan where you and your employer contribute money that grows tax-deferred until you withdraw it in retirement.
  • Your employer must offer the plan — you cannot open one on your own — and they typically match a portion of your contributions.
  • You can contribute up to $23,500 per year (as of 2024), and if you are age 50 or older, you can add an extra $7,500 catch-up contribution.
  • Money in a 403(b) grows without being taxed each year, but you pay income tax on withdrawals after age 59½.
  • If you leave your job, you can roll your 403(b) balance into an IRA or another employer's retirement plan to keep it growing tax-deferred.

How contributions and employer matching work

When you enroll in a 403(b), you choose what percentage of your paycheck to contribute — typically between 1% and 25% of your gross salary. That amount is deducted before taxes are calculated, which lowers your taxable income for the year. Your employer then contributes their own money, usually a percentage of your salary or a match of what you contribute.

Employer matching varies widely. Some nonprofits match dollar-for-dollar up to 3% of your salary. Others contribute a flat percentage regardless of what you contribute. A few offer no match at all. The match is assistance programs, so it is worth understanding your employer's formula before you decide how much to contribute yourself.

The total you and your employer can contribute is capped by the IRS. For 2024, the limit is $23,500 from your own paycheck, plus whatever your employer contributes (up to a combined total of $69,000). If you are 50 or older, you can add an extra $7,500 catch-up contribution. These limits change annually, so check with your plan administrator if you are near the cap.

How investment choices and account growth work

Once money is in your 403(b), you direct how it is invested. Most plans offer a menu of mutual funds, target-date funds (which automatically shift from stocks to bonds as you near retirement), and sometimes stable value funds (which aim to preserve principal). A few plans also offer annuities, which are insurance products that may provide a minimum return or a set income stream in retirement.

The money grows tax-deferred, meaning you do not pay income tax on the gains each year. If a fund earns 7% in a given year, that full 7% stays in your account and compounds. You only pay tax when you withdraw the money after retirement. This tax deferral is one of the main reasons employers offer 403(b) plans — it helps employees save more because the tax bill is pushed into the future.

You can usually change your investment choices once or twice a year, or when your life circumstances change (marriage, birth of a child, job change). Some plans allow more frequent changes. If you are unsure which funds to pick, many plans offer a target-date fund that matches your expected retirement year — these are a simple starting point for people who do not want to manage their investments actively.

Withdrawal rules and tax treatment

You can withdraw money from your 403(b) starting at age 59½ without penalty. Withdrawals before that age are subject to a 10% early withdrawal penalty plus income tax on the amount withdrawn. A few exceptions exist — hardship withdrawals for medical bills or eviction, or loans against your balance — but these are limited and come with their own rules.

When you do withdraw, the entire amount is taxed as ordinary income in the year you withdraw it. If you withdraw $50,000, that $50,000 is added to your other income for tax purposes. This is different from a Roth 403(b) (offered by some employers), where contributions are made after tax but withdrawals in retirement are tax-free.

You must begin taking withdrawals by April 1 of the year after you turn 73 (this age changed in 2023). These are called required minimum distributions (RMDs), and the IRS calculates how much you must withdraw based on your age and account balance. If you do not take the RMD, you face a 25% penalty on the amount you should have withdrawn.

What happens to your 403(b) when you leave your job

If you change jobs, you have several options for your 403(b) balance. You can leave it with your former employer's plan if the balance is large enough (usually at least $5,000). You can roll it into your new employer's 403(b) or 401(k) plan if they allow it. Or you can roll it into an Individual Retirement Account (IRA), which gives you more investment choices and often lower fees.

A rollover is a direct transfer from one account to another — the money never touches your hands, and no taxes are owed. This is different from a withdrawal, where you receive the money and have 60 days to deposit it elsewhere or face taxes and penalties. Always request a direct rollover to avoid this trap.

If you leave your job before age 59½, your new account still has the same early withdrawal penalty rules. However, some plans offer a "separation from service" exception that lets you withdraw penalty-free after you leave, even if you are younger than 59½. Ask your plan administrator whether this option exists in your plan.

403(b) versus other retirement plans

A 403(b) is similar to a 401(k), which is the retirement plan used by for-profit companies. Both are tax-deferred, both have employer matching, and both have the same contribution limits. The main difference is the type of employer: nonprofits and schools use 403(b), while private companies use 401(k). A 457(b) is used by some government employees and works similarly but has different withdrawal rules.

A traditional pension, by contrast, is funded entirely by your employer and guarantees a set monthly payment for life. You do not contribute to it, and you do not choose how it is invested. Pensions are less common now than they were 30 years ago, but some school districts, universities, and government agencies still offer them alongside or instead of a 403(b).

If your employer offers both a pension and a 403(b), you typically participate in both. The pension provides a may provide base income, and the 403(b) lets you save additional money for retirement. Understanding which plan you have and how they work together is important for retirement planning.

Frequently Asked Questions

Can I have a 403(b) if I am self-employed or a freelancer?

No. A 403(b) must be offered by an employer — you cannot open one on your own. If you are self-employed, you can open a Solo 401(k) or a SEP-IRA instead, which have similar tax benefits and contribution limits.

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

Your beneficiary (usually a spouse or child) inherits the balance. They can roll it into an inherited IRA and continue to let it grow tax-deferred, or they can withdraw it. The rules depend on whether the beneficiary is a spouse or not, so check your plan documents or ask your plan administrator.

Can I borrow money from my 403(b)?

Many plans allow loans against your balance, typically up to 50% of what you have saved or $50,000, whichever is less. You repay the loan with interest, and the interest goes back into your account. If you leave your job before the loan is repaid, you usually must repay it immediately or face taxes and penalties.

Is a 403(b) the same as a pension?

No. A pension is may provide by your employer and pays a set amount for life. A 403(b) is a savings account where you and your employer contribute, and the amount you receive depends on how much you saved and how well it was invested. Pensions are rarer now, but some employers offer both.

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

You can open an IRA on your own through a bank or investment firm. An IRA has lower contribution limits than a 403(b) ($7,000 per year in 2024), but it gives you full control over your investments and no employer involvement is needed.