A 403(b) is a retirement savings account for teachers, nurses, and other nonprofit workers

A 403(b) account is a retirement savings plan offered by schools, hospitals, nonprofits, and some government agencies. It works similarly to a 401(k)—you contribute money from your paycheck before taxes, the money grows over time, and you withdraw it in retirement. The main difference is who can use it: 403(b)s are for employees of tax-exempt organizations, not for-profit companies.

Your employer sets up the plan and chooses which investment companies will manage the accounts. You pick how much to contribute each paycheck, up to an annual limit set by the IRS. The money you contribute reduces your taxable income for that year, which means a smaller tax bill now. When you withdraw the money in retirement, you pay income tax on it then.

The account stays with you even if you change jobs within the nonprofit sector. You can roll it into another 403(b), an IRA, or a 401(k) at a new employer. You cannot touch the money before age 59½ without penalty in most cases, though some plans allow loans or hardship withdrawals.

Key Takeaways

  • A 403(b) is a tax-deferred retirement account for employees of schools, hospitals, nonprofits, and certain government agencies.
  • You contribute pre-tax money from your paycheck, which lowers your taxable income in the year you contribute.
  • Your employer chooses the investment companies that manage 403(b) accounts, so your options depend on what your employer offers.
  • You can withdraw money penalty-free starting at age 59½, and you pay income tax on withdrawals at that time.
  • If you leave your job, you can roll your 403(b) balance into another retirement account without triggering taxes or penalties.

How contributions and investment choices work

You decide how much of each paycheck goes into your 403(b), within IRS limits. For 2024, you can contribute up to $23,500 per year (this amount changes yearly). If you are 50 or older, you can add an extra $7,500 per year as a catch-up contribution. Your employer may also contribute money to your account—some do, some do not, and the amount varies widely.

Your employer picks which investment companies offer accounts through your plan. Common providers include Fidelity, Vanguard, and TIAA. Each provider offers different investment options—typically mutual funds, annuities, or a mix of both. You choose where your money goes among the options your employer's plan includes. You cannot invest in any company you want; you are limited to what your employer's plan offers.

Some 403(b) plans offer a Roth option, which works differently: you contribute after-tax money, but withdrawals in retirement are tax-free. Not all employers offer this, so check your plan documents or ask your HR department.

Withdrawal rules and penalties

You can withdraw money from your 403(b) starting at age 59½ without penalty. When you do, you pay income tax on the amount you withdraw. You must begin taking withdrawals by age 73 (this is called a required minimum distribution, or RMD), and the IRS calculates how much you must take each year based on your age and account balance.

If you withdraw money before age 59½, you typically owe a 10% penalty plus income tax on the amount withdrawn. There are exceptions: if you leave your job in the year you turn 55 or later, you can withdraw without the 10% penalty (though you still pay income tax). Some plans also allow loans—you borrow from your own account and repay it with interest—or hardship withdrawals for specific situations like medical bills or eviction. The rules for loans and hardship withdrawals vary by plan.

If you leave your job, you do not have to withdraw the money when ready. You can leave it in the 403(b), roll it into a new employer's plan, or roll it into an IRA. Rolling it over avoids taxes and penalties and often gives you more investment choices than staying in the old plan.

How 403(b)s differ from 401(k)s and IRAs

A 403(b) and a 401(k) are both employer-sponsored plans with the same annual contribution limits and withdrawal rules. The main difference is who offers them: 401(k)s are for for-profit companies, and 403(b)s are for nonprofits and schools. Some 403(b) plans are less regulated than 401(k)s, which can mean fewer protections or higher fees, so it is worth reviewing your plan documents.

An IRA (Individual Retirement Account) is different: you open it on your own, not through an employer. IRAs have lower annual contribution limits ($7,000 in 2024) but more investment choices because you can invest in any stock, bond, or fund you want. Many people use both—a 403(b) through work and an IRA on the side to save more for retirement.

If you have a 403(b) and want to open an IRA, you can do both. If you have a high income, you may not be able to deduct IRA contributions if you also have a 403(b), so check the IRS rules or talk to a tax professional.

Fees and what to watch for

403(b) plans can charge fees in several ways: investment fees (charged by the mutual fund or annuity company), administrative fees (charged by your employer's plan), and advisor fees (if you pay someone to manage your account). These fees reduce your returns over time, so it is worth understanding what you are paying.

Some 403(b) plans, especially older ones, use annuities as the main investment option. Annuities can have high fees and complex terms, so read the contract carefully. If your plan offers mutual funds alongside annuities, mutual funds often have lower fees. Ask your HR department or plan administrator for a fee breakdown.

You can request a summary of plan fees from your employer. If fees seem high or you do not understand them, ask HR or the plan provider to explain. Some employers allow you to move money between investment options within the plan, so you can shift to lower-cost choices if available.

What happens if your employer does not offer a 403(b)

If your nonprofit employer does not offer a 403(b), you can open an IRA on your own. An IRA has lower contribution limits but gives you full control over where your money is invested. You can open one at any bank, brokerage, or investment company.

Some nonprofits offer a straightforward IRA or SEP IRA instead of a 403(b). These are employer-sponsored plans with different rules and contribution limits. If your employer offers either of these, they will explain how it works during onboarding.

If you are self-employed or have side income, you can also open a Solo 401(k) or Solo Roth 401(k), which have higher contribution limits than a regular IRA. These are separate from any 403(b) you might have through a nonprofit job.

Rolling over a 403(b) when you change jobs

When you leave a job where you had a 403(b), you have several options. You can leave the money in the old plan (if the balance is above a certain amount, usually $5,000), roll it into your new employer's 401(k) or 403(b), or roll it into an IRA. Each option has trade-offs.

Leaving money in the old plan is straightforward but means you cannot add more to it and you may have limited investment choices. Rolling into a new employer plan keeps everything in one place but limits you to that plan's investment options. Rolling into an IRA gives you the most investment choices and often lower fees, but you lose access to employer matching (if any) and certain loan options.

A rollover is not taxable if you do it correctly. The safest method is a direct rollover, where the old plan sends the money directly to the new account. If you take the money yourself, you have 60 days to deposit it in a new account, or the IRS treats it as a withdrawal and taxes it. Ask your old plan administrator how to request a direct rollover.

Frequently Asked Questions

Can I withdraw money from my 403(b) before retirement?

You can withdraw before age 59½, but you will owe a 10% penalty plus income tax unless an exception applies. Some plans allow loans or hardship withdrawals for specific situations. If you leave your job at age 55 or later, you can withdraw without the 10% penalty. Check your plan documents or ask HR about your specific options.

What happens to my 403(b) if I leave my job?

Your money stays yours. You can leave it in the old plan, roll it into a new employer's plan, or roll it into an IRA. A direct rollover to an IRA is often the best option because it avoids taxes and gives you more investment choices. You have time to decide—there is no important date to roll over.

Does my employer have to match my 403(b) contributions?

No. Some employers match a portion of what you contribute, but many do not. Check your plan documents or ask HR whether your employer offers matching. If they do, it is information programs, so contribute at least enough to get the full match.

Can I have both a 403(b) and an IRA?

Yes. You can contribute to both in the same year, though the annual limits are separate. If you have a high income, you may not be able to deduct IRA contributions if you also have a 403(b), so check IRS rules or talk to a tax professional about your situation.

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

They work almost the same way and have the same contribution limits and withdrawal rules. The main difference is who offers them: 401(k)s are for for-profit companies, and 403(b)s are for nonprofits, schools, and government agencies. Some 403(b) plans have higher fees or fewer protections, so review your plan documents.