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

A 403(b) plan is a retirement savings account offered by schools, hospitals, nonprofits, and some government agencies instead of a 401(k). You contribute money from your paycheck before taxes are taken out, the money grows tax-free while it sits in the account, and you pay taxes only when you withdraw it in retirement. The name comes from the section of the tax code that created it.

The main difference between a 403(b) and a 401(k) is who offers it. A 403(b) is for employees of tax-exempt organizations — public schools, universities, nonprofits, and certain government employers. A 401(k) is for employees of for-profit companies. The rules are similar enough that if you understand one, the other makes sense quickly.

If your employer offers a 403(b), you decide how much to contribute each paycheck, choose where that money is invested, and watch the balance grow. Your employer may also add money to your account as a match — though not all nonprofits do this, and the amounts vary widely.

Key Takeaways

  • A 403(b) lets you set aside money from your paycheck before taxes, so you pay less income tax now and taxes only on withdrawals later.
  • Your employer chooses which investment companies offer plans through your workplace, so your investment options depend on which company your employer contracts with.
  • You can contribute up to $23,500 per year (as of 2024), and if you are 50 or older you can add an extra $7,500 catch-up contribution.
  • You cannot withdraw money before age 59½ without a penalty, except in narrow cases like financial hardship or leaving your job.
  • If you change jobs, you can roll your 403(b) balance into a new employer's plan or into an IRA to keep it growing tax-free.

How money flows in and out of your 403(b)

When you enroll in your employer's 403(b), you tell your payroll department what percentage of your paycheck to contribute — for example, 5% or 10%. That amount is deducted from your gross pay before federal income tax is calculated, which lowers your taxable income for the year. If you earn $50,000 and contribute $5,000 to your 403(b), you only pay income tax on $45,000.

The money goes directly to the investment company your employer has chosen — usually Fidelity, Vanguard, TIAA, or another large firm. You then pick how that money is invested: in stock funds, bond funds, target-date funds (which automatically shift from stocks to bonds as you near retirement), or other options the company offers. The investment grows tax-free, meaning you do not pay taxes on the gains each year the way you would in a regular brokerage account.

When you turn 59½, you can start withdrawing money without penalty. You pay income tax on whatever you withdraw that year, but the money comes out. If you withdraw before 59½, you owe a 10% early withdrawal penalty on top of income tax — unless you may have access to for an exception like a financial hardship, a loan from the plan, or separation from service (leaving your job).

Contribution limits and catch-up contributions

For 2024, you can contribute up to $23,500 of your own money per year to a 403(b). This limit resets each January. If you contribute $2,000 per month, you hit the limit in November and cannot contribute more that year.

If you are 50 or older, you can add an extra $7,500 per year — called a catch-up contribution — for a total of $31,000. This rule exists because people who started saving late have less time to build retirement savings. The catch-up amount is separate from your regular contribution limit, so you can max out both in the same year.

Your employer may also contribute to your account as a match — for example, matching 3% of what you contribute. This employer money counts toward a separate limit of $69,000 total per year (employee plus employer contributions combined, as of 2024). Most people do not hit this higher limit because it requires very high salaries or large employer matches.

How your employer's choice of investment company affects you

Your employer contracts with one or more investment companies to offer 403(b) plans to staff. Common providers include TIAA, Fidelity, Vanguard, and Valic. Your employer decides which company or companies to use, so you can only invest through the options they have chosen.

This matters because each company offers different funds, different fee structures, and different customer service. If your employer uses only TIAA, you cannot open a Vanguard 403(b) through work — you would have to open a separate IRA outside of work. Some employers offer multiple providers, giving you more choice. Before you enroll, ask your HR or payroll department which companies are available and request the fee schedules, because fees vary and can eat into your returns over decades.

What happens to your 403(b) when you change jobs

If you leave your job, you have several options for the money in your 403(b). You can leave it where it is if the balance is above a certain amount (usually $5,000), let it grow tax-free, and withdraw it later. You can roll it into your new employer's 403(b) or 401(k) if that plan accepts rollovers. Or you can roll it into an Individual Retirement Account (IRA), which gives you more investment choices and often lower fees than a workplace plan.

A rollover means moving the money directly from one account to another without you touching it, so no taxes are owed and no penalties explore. This is different from a withdrawal, where the money goes to you and you have 60 days to deposit it elsewhere or face taxes and penalties. Always ask for a direct rollover to avoid this trap.

If you have a small balance — under $5,000 — your old employer may force you to move it or cash it out. If you cash it out, you owe income tax plus a 10% penalty unless you roll it into an IRA within 60 days. For this reason, rolling over even small balances is usually the better choice.

The difference between a 403(b) and similar plans

A 403(b) is for nonprofit and government employees. A 401(k) is for for-profit company employees. The rules are nearly identical — same contribution limits, same age 59½ withdrawal rules, same tax treatment — but the employer type is different.

A 457(b) plan is another option for some government employees. It has the same contribution limit as a 403(b) but slightly different rules: you can withdraw at any age without penalty if you separate from service, and you do not have to take withdrawals at age 72 the way you do with a 403(b).

An IRA is a retirement account you open on your own, not through an employer. You can contribute up to $7,000 per year (as of 2024), and you have much more control over investments. Many people use an IRA alongside a 403(b) to save more and get better investment options.

Required withdrawals and taxes in retirement

Starting at age 73, you must withdraw a minimum amount from your 403(b) each year, called a Required Minimum Distribution (RMD). The amount is calculated based on your age and account balance. If you do not take the RMD, you owe a 25% penalty on the amount you should have withdrawn (reduced to 10% if you correct it within two years).

Every dollar you withdraw is taxed as ordinary income in the year you withdraw it. If you withdraw $30,000 in a year when you also have Social Security income, all three income sources count toward your total taxable income, which can push you into a higher tax bracket. Some retirees work with a tax professional to plan withdrawals strategically across multiple years to minimize taxes.

If you do not need the money in retirement, you cannot straightforward leave it in the account to avoid taxes. You must take the RMD, but you can donate it to a charity directly from your IRA or 403(b) (called a may have access to Charitable Distribution) to avoid counting it as taxable income — though this only works if you are 70½ or older and donate to a may have access to charity.

Frequently Asked Questions

Can I borrow money from my 403(b)?

Many 403(b) plans allow loans, but not all. If your plan allows it, you can usually borrow up to 50% of your balance or $50,000, whichever is less. You repay the loan with interest over five years (or longer if the money is for a home purchase). If you leave your job before repaying, the loan balance is treated as a withdrawal and you owe taxes and penalties on it.

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

You can open an IRA on your own through any bank or investment company. You can contribute up to $7,000 per year (as of 2024). An IRA gives you full control over investments and no employer involvement, though the contribution limit is lower than a 403(b).

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

Yes. You can contribute to both in the same year. The limits are separate: up to $23,500 in the 403(b) and up to $7,000 in an IRA. However, if you have a high income, contributing to a traditional IRA may reduce the tax deduction you can claim, so check with a tax professional.

What happens if I withdraw before 59½?

You owe income tax plus a 10% early withdrawal penalty on the amount withdrawn. Exceptions include financial hardship (though the definition is strict), a loan from the plan, or separation from service. Some plans also allow withdrawals for disability or medical expenses. Ask your plan administrator which exceptions explore to your plan.

Do I have to enroll in my employer's 403(b)?

No. Enrollment is voluntary. However, many employers offer a match — information programs — so declining means leaving that benefit on the table. Even if there is no match, starting early gives your money more time to grow tax-free, which compounds significantly over decades.