What a 403(b) account is
A 403(b) account is a retirement savings plan offered by certain employers—specifically schools, hospitals, nonprofits, and some government agencies. It works similarly to a 401(k), but with different rules and lower contribution limits. You put money in before taxes are taken out, the money grows tax-free while it sits in the account, and you pay taxes when you withdraw it in retirement.
The name comes from the section of the tax code that created it. These accounts are sometimes called tax-sheltered annuities or TSAs, though that term is less common now. The key difference from a 401(k) is that 403(b) plans are designed for employees of nonprofits and public institutions, not for-profit companies.
Your employer sets up the plan and chooses which investment companies can offer accounts through it. You do not choose the investment company yourself—you pick from the options your employer has already approved. This is different from an IRA, where you open an account directly with a bank or brokerage.
Key Takeaways
- A 403(b) account is a retirement plan available only through certain employers: schools, hospitals, nonprofits, and some government agencies.
- Money you contribute reduces your taxable income for the year, and the account grows tax-free until you withdraw it in retirement.
- Your employer chooses which investment companies offer accounts through the plan, so you pick from their approved list, not any company you want.
- The annual contribution limit is lower than a 401(k)—currently $23,500 for people under 50, with a catch-up option of $7,500 more if you are 50 or older.
- You cannot withdraw money before age 59½ without penalty in most cases, though some plans allow loans or hardship withdrawals.
How contributions work and what they cost you
When you enroll in a 403(b) plan, you choose a percentage of your paycheck to contribute—usually between 1% and 25%, depending on what your employer allows. That amount comes out of your gross pay before federal income tax is calculated, which lowers your taxable income for the year.
For example, if you earn $50,000 a year and contribute $300 per month ($3,600 per year), your taxable income drops to $46,400. You pay income tax only on that lower amount. This is the main tax advantage of the account: you defer taxes until you withdraw the money.
Your employer may also contribute to your account—this is called a match. Not all 403(b) plans offer a match, and the amount varies widely. Some employers match dollar-for-dollar up to 3% of your salary; others contribute a flat percentage regardless of what you put in. Check your plan documents or ask your HR department what your employer offers.
The total you and your employer can contribute in 2024 is capped at $23,500 if you are under 50. If you are 50 or older, you can add an extra $7,500 catch-up contribution, bringing the total to $31,000. These limits change yearly with inflation.
Investment options and how your money grows
A 403(b) account holds investments—usually mutual funds or annuities—that you choose from a menu your employer provides. You do not pick individual stocks. The investment companies your employer has contracted with offer several fund options, often ranging from conservative (bonds, stable value funds) to aggressive (stock-heavy funds).
Your money grows tax-free inside the account. If a fund earns 7% in a year, you do not pay taxes on that 7% gain. The taxes are deferred until you withdraw the money. This compounding effect—earning returns on your returns—is what makes long-term retirement saving work.
You can usually change how your money is invested once or twice a year, or whenever your life circumstances change significantly (marriage, birth of a child, job change). Some plans allow more frequent changes. The investment performance depends entirely on which funds you choose and how the markets perform—there is no may provide of returns.
Vesting and when the money is actually yours
Vesting means the point at which employer contributions become yours to keep. Your own contributions are always 100% yours when ready—you can never lose that money. But employer matches or contributions may have a vesting schedule.
A common vesting schedule is three years of service for full vesting, meaning if you leave your job after two years, you keep your own contributions but lose the employer match. Some plans vest when ready (you own the match right away), and others have longer schedules. Your plan documents will state the exact vesting schedule.
If you leave your job, you can roll the vested balance into an IRA or into a new employer's retirement plan. You do not have to withdraw it and pay taxes when ready—a rollover lets you keep the money growing tax-free in another account.
Withdrawals and penalties before retirement
You cannot withdraw money from a 403(b) account before age 59½ without paying a 10% penalty on top of income taxes, with a few exceptions. This is the main restriction: the account is designed to stay untouched until retirement.
The exceptions are narrow. You can withdraw without penalty if you are no longer employed by the organization that sponsors the plan and you are at least 55 years old. You can also withdraw without penalty if you have a may have access to hardship—typically defined as medical expenses, education costs, or preventing eviction or foreclosure. The rules vary by plan, so check your plan documents.
Some 403(b) plans allow you to borrow against your own contributions (not the employer match). You repay the loan to yourself with interest, and the interest goes back into your account. This is not a withdrawal, so there is no tax or penalty, but you must repay it on schedule or it becomes a taxable withdrawal.
Once you turn 59½, you can withdraw money whenever you want without penalty. You will owe income tax on the withdrawal, but not the 10% penalty. At age 73, you must begin taking required minimum distributions (RMDs)—the IRS requires you to withdraw a certain amount each year based on your age and account balance.
Who can open a 403(b) and how to enroll
You can only open a 403(b) account if your employer offers one. These plans are limited to employees of public schools, colleges and universities, hospitals and health care organizations, nonprofits with 501(c)(3) status, and certain government agencies. If you work for a for-profit company, your employer would offer a 401(k) instead, not a 403(b).
To enroll, contact your HR or benefits department and ask for the plan enrollment materials. They will give you a list of investment companies and fund options available through your plan. You choose how much to contribute (as a percentage of your paycheck) and which funds to invest in. The enrollment process usually takes 15 to 30 minutes and happens entirely through your employer.
You can enroll when you first become may be able to access—usually on your hire date or after a waiting period of 30 to 90 days. You can also change your contribution amount or investment choices during the annual open enrollment period, which your employer will announce. Some plans allow changes at any time.
403(b) vs. other retirement accounts
A 403(b) is one of several ways to save for retirement. The main alternatives are a 401(k) (for for-profit company employees), a traditional IRA, and a Roth IRA. Each has different contribution limits, tax treatment, and rules about withdrawals.
| Account Type | Who Can Use It | 2024 Contribution Limit (under 50) | Tax Treatment |
|---|---|---|---|
| 403(b) | Nonprofit and school employees | $23,500 | Contributions reduce taxable income; withdrawals taxed as income |
| 401(k) | For-profit company employees | $23,500 | Contributions reduce taxable income; withdrawals taxed as income |
| Traditional IRA | Anyone with earned income | $7,000 | Contributions may reduce taxable income; withdrawals taxed as income |
| Roth IRA | Anyone with earned income (income limits explore) | $7,000 | Contributions do not reduce taxable income; withdrawals are tax-free |
The 403(b) and 401(k) have the same contribution limit and similar tax rules. The main difference is who offers them. A 403(b) is also simpler in some ways—you do not choose the investment company, your employer does, so there are fewer options to evaluate. But this also means less control over where your money goes.
If you work for a nonprofit or school and your employer offers a 403(b), that is usually your best option because the contribution limit is much higher than an IRA. If your employer does not offer a plan, you can open a traditional or Roth IRA on your own through a bank or brokerage.
Frequently Asked Questions
Can I have both a 403(b) and an IRA at the same time?
Yes. You can contribute to both a 403(b) through your employer and a traditional or Roth IRA on your own. However, if you have a traditional IRA and a 403(b), the deductibility of your IRA contributions may be limited depending on your income. Consult a tax professional about your specific situation.
What happens to my 403(b) if I leave my job?
The money stays in the account and continues to grow tax-free. You can leave it there, roll it into an IRA, or roll it into a new employer's retirement plan if your new job offers one. You cannot make new contributions once you leave, but the existing balance remains yours.
Can I withdraw money from my 403(b) to pay off debt?
You can withdraw money, but you will owe income tax on the withdrawal plus a 10% penalty if you are under 59½. Some plans allow hardship withdrawals for specific reasons like preventing foreclosure, but credit card debt typically does not may have access to. The penalty usually makes this an expensive option.
Does my employer have to match my contributions?
No. Employer matches are optional. Some 403(b) plans include a match, others do not. Check your plan documents or ask HR what your employer offers. If your employer does match, contributing at least enough to get the full match is usually worth doing—it is information programs.
What is the difference between a 403(b) and an annuity?
A 403(b) is the retirement plan itself. An annuity is one type of investment you can hold inside a 403(b). Some 403(b) plans offer only annuities; others offer mutual funds, stable value funds, or a mix. Ask your HR department what investment types are available in your plan.