403(b) Plan: A Comprehensive Guide

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Last updated: Jul 21, 2023

Understanding the 403(b) Plan

The 403(b) plan, also known as a tax-sheltered annuity (TSA) or a tax-deferred annuity (TDA) plan, is a retirement savings vehicle available to employees of certain nonprofit organizations, public educational institutions, and religious organizations. This plan offers valuable tax benefits and encourages long-term savings to ensure a financially secure retirement for eligible employees.

💡 Key Ideas

  • The 403(b) plan is a retirement savings vehicle designed for employees of nonprofit organizations, public educational institutions, and religious entities.

  • Contributions to the 403(b) plan are made through pre-tax salary deferrals, reducing the employee's current taxable income.

  • Some employers offer matching contributions to incentivize employees to save for retirement.

  • The 403(b) plan provides tax-deferred growth, allowing earnings to compound over time until withdrawal during retirement.

  • Withdrawals from the 403(b) plan are generally not permitted until age 59½, and early withdrawals may result in penalties.

Eligibility and Participation

To participate in a 403(b) plan, an individual must be employed by an eligible organization, such as a public school, college, university, hospital, or a charitable entity described in Section 501(c)(3) of the Internal Revenue Code. Additionally, ministers and employees of churches and church-controlled organizations are eligible to take advantage of the 403(b) plan.


Contributions to a 403(b) plan are typically made through salary deferrals. Employees can elect to have a portion of their pre-tax income withheld and contributed directly to the plan, thereby reducing their current taxable income. These contributions are often referred to as elective deferrals or salary reduction contributions.

The maximum amount an individual can contribute to a 403(b) plan is subject to IRS limitations, and these limits may be adjusted periodically to account for inflation. Employees who are age 50 or older may also be eligible to make catch-up contributions, allowing them to contribute additional amounts beyond the standard limits.

Employer Contributions

In addition to employee contributions, some employers offer a matching contribution as an incentive for employees to save for retirement. Employer contributions can significantly boost an employee's retirement savings and should be taken advantage of whenever possible.

Investment Options

403(b) plans typically offer a range of investment options to participants, allowing them to choose from various funds and strategies based on their risk tolerance and retirement goals. Common investment options include mutual funds, annuities, and target-date funds, among others.

It is essential for participants to carefully assess their investment choices and consider factors such as fees, historical performance, and diversification to construct a well-balanced and diversified portfolio.

Tax Benefits

One of the primary advantages of the 403(b) plan is its tax-deferred nature. Contributions made to the plan are deducted from the employee's taxable income, reducing their current tax liability. As a result, participants can enjoy immediate tax savings and potentially find themselves in a lower tax bracket.

Furthermore, the earnings on contributions grow tax-deferred until withdrawn during retirement. This tax-deferral allows the potential for compounding returns over time, amplifying the growth of retirement savings.

Withdrawals and Distribution Rules

Withdrawals from a 403(b) plan are generally not permitted until the participant reaches age 59½. If withdrawals are made before this age, they may be subject to a 10% early withdrawal penalty in addition to regular income taxes.

Once the participant reaches age 59½, they can begin taking distributions from the plan without incurring the early withdrawal penalty. However, regular income taxes will apply to the distributed amounts. Participants are required to start taking Required Minimum Distributions (RMDs) from their 403(b) plan once they reach age 72, or in some cases, when they retire, depending on their employment status.

Roth 403(b) Option

Some employers offer a Roth 403(b) option, which allows participants to make after-tax contributions to the plan. Unlike traditional 403(b) contributions, Roth 403(b) contributions do not provide an immediate tax deduction. However, qualified withdrawals from a Roth 403(b) plan during retirement are entirely tax-free, including any earnings generated over the years.

The decision between a traditional 403(b) and a Roth 403(b) depends on individual tax circumstances and future retirement income projections.

Example of a 403(b) Plan in Action

To better illustrate how a 403(b) plan works in practice, let's consider the case of Sarah, a 35-year-old public school teacher who has been diligently contributing to her 403(b) plan for the past decade.

Sarah's Background

  • Age: 35
  • Annual Salary: $50,000
  • Employee Contribution Rate: 6% of her salary
  • Employer Matching Contribution: 3% of her salary

Contribution and Tax Benefits

Sarah contributes 6% of her $50,000 annual salary to her 403(b) plan, which amounts to $3,000 per year. Since this is a pre-tax contribution, her current taxable income reduces to $47,000, providing her with an immediate tax saving. If Sarah were in the 25% tax bracket, her tax savings would be $750 ($3,000 * 0.25).

Furthermore, Sarah's employer offers a matching contribution of 3% of her salary, which equals $1,500 per year. This additional contribution helps boost her retirement savings without any additional cost from her salary.

Investment and Growth

Sarah's 403(b) plan offers a variety of investment options, and she decides to allocate her contributions into a mix of low-cost index funds and target-date funds that align with her risk tolerance and retirement goals.

Over the next 30 years, assuming an average annual return of 7%, Sarah's contributions, combined with her employer's matching contributions, can grow substantially due to the power of compounding. Let's see how her account balance might grow over time:

YearTotal ContributionsEmployer MatchingInvestment GrowthAccount Balance

Retirement and Distribution

By the time Sarah reaches age 65, her 403(b) account balance has grown to approximately $222,736. Since Sarah has reached age 59½, she can now begin withdrawing from her 403(b) plan without incurring any early withdrawal penalties.

Suppose Sarah decides to take a systematic withdrawal approach during her retirement, drawing 4% annually from her 403(b) plan balance. This would provide her with a yearly income of $8,909, in addition to any other retirement income sources she might have.

Keep in mind that the actual account balance and income figures may vary based on investment performance and changes in contribution rates over the years. Additionally, taxes will apply to Sarah's withdrawals during retirement.


Sarah's example demonstrates the long-term benefits of participating in a 403(b) plan. Through consistent contributions, employer matching, and wise investment choices, Sarah was able to accumulate a substantial retirement nest egg. The tax advantages and potential for growth make the 403(b) plan an attractive option for employees seeking to secure their financial future in retirement. As with any retirement plan, careful planning, and regular review of investment strategies are essential for maximizing the benefits of the 403(b) plan.

Comparing the 403(b) Plan to Other Types of Retirement Plans

401(k) Plan

The 401(k) plan is one of the most common retirement plans offered by for-profit private sector employers. Like the 403(b) plan, it allows employees to make pre-tax contributions through salary deferrals. The main difference lies in the eligible employers, as 401(k) plans are offered by private companies, while 403(b) plans are designed for certain nonprofit organizations, educational institutions, and religious entities. Both plans often offer employer matching contributions and similar investment options. However, 401(k) plans may have different administrative fees and investment choices compared to 403(b) plans.

Traditional IRA

A Traditional Individual Retirement Account (IRA) is available to anyone with earned income, regardless of their employment status or employer. Unlike the 403(b) plan, contributions to a Traditional IRA are generally not made through salary deferrals but are made with post-tax income. However, contributions to a Traditional IRA are tax-deductible, providing potential tax benefits similar to a 403(b). Both plans offer tax-deferred growth, but Traditional IRAs have lower contribution limits compared to 403(b) plans. Additionally, Traditional IRAs do not have employer matching contributions, making them a more independent savings option.

Roth IRA

The Roth Individual Retirement Account (IRA) is similar to the Roth 403(b) option, as contributions are made with after-tax income, but qualified withdrawals during retirement are tax-free. Both the Roth IRA and Roth 403(b) offer tax-free growth potential, providing a contrast to the tax-deferred growth in Traditional IRAs and 403(b) plans. Eligibility for a Roth IRA is income-dependent, and the contribution limits are lower than those of a 403(b) plan. While both Roth options allow for tax-free withdrawals, the Roth 403(b) may appeal more to individuals who work in the education or nonprofit sectors.

Simplified Employee Pension (SEP) IRA

The SEP IRA is designed for self-employed individuals and small business owners to provide retirement benefits to themselves and their employees. Unlike the 403(b) plan, SEP IRAs are not limited to specific types of employers. SEP IRA contributions are made by the employer, and employees are not allowed to make salary deferrals. SEP IRAs may be a suitable alternative for those who are self-employed or have their own business but do not work for a qualifying organization eligible for a 403(b) plan.


Each retirement plan type has its own unique features and eligibility criteria. The 403(b) plan is tailored to the needs of employees working in specific nonprofit and educational sectors, offering attractive tax advantages and employer matching contributions. While similar in principle, other retirement plans like the 401(k) plan, Traditional IRA, Roth IRA, and SEP IRA cater to different employment situations and may have distinct contribution limits, tax treatments, and employer involvement. It is essential for individuals to assess their specific financial circumstances and retirement goals to determine the most suitable retirement savings option for their future.

Frequently Asked Questions (FAQ) about the 403(b) Plan

1. Who is eligible to participate in a 403(b) plan?

Employees of nonprofit organizations, public educational institutions, and religious organizations are typically eligible to participate in a 403(b) plan. This includes teachers, professors, healthcare workers, ministers, and other employees working in eligible institutions.

2. How much can I contribute to my 403(b) plan?

The maximum contribution limit for a 403(b) plan is determined by the IRS and may be adjusted periodically. As of 2021, the standard contribution limit is $19,500 per year for individuals under 50 years old. Employees aged 50 or older may be eligible for catch-up contributions, allowing them to contribute an additional $6,500, bringing the total to $26,000.

3. Are employer contributions mandatory in a 403(b) plan?

Employer contributions to a 403(b) plan are not mandatory. Some employers offer matching contributions as an incentive for employees to save for retirement, while others may not provide any additional contributions beyond what employees contribute themselves.

4. Can I take a loan from my 403(b) account?

Yes, some 403(b) plans allow participants to take loans from their account balance. However, not all plans offer this feature, and there are specific rules and limitations on the amount that can be borrowed. Additionally, taking a loan from your retirement account may have consequences on your retirement savings, so careful consideration is advised.

5. When can I start withdrawing from my 403(b) plan?

Generally, you can start withdrawing from your 403(b) plan once you reach age 59½. If you withdraw funds before this age, you may be subject to a 10% early withdrawal penalty in addition to regular income taxes. However, there are exceptions, such as if you retire or become disabled.

6. Can I rollover my 403(b) into another retirement account?

Yes, you can rollover your 403(b) account into another eligible retirement account, such as an Individual Retirement Account (IRA) or another employer-sponsored retirement plan, if you change jobs. This rollover process allows you to maintain the tax-deferred status of your retirement savings.

7. What happens to my 403(b) if I change jobs?

If you change jobs, you have several options for your 403(b) plan. You can leave the account with your previous employer's plan (if allowed), roll it over into a new employer's retirement plan (if eligible), or transfer it to an Individual Retirement Account (IRA).

8. Are there any penalties for not taking Required Minimum Distributions (RMDs)?

Yes, there are penalties for not taking Required Minimum Distributions (RMDs) from your 403(b) plan once you reach age 72. If you fail to take the required amount, you may be subject to a hefty penalty of 50% of the RMD amount that should have been withdrawn.

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

Yes, you can have both a 403(b) plan and an IRA, but the total combined contributions to both accounts must not exceed the IRS annual contribution limits for each account type.

10. What happens to my 403(b) if I pass away?

If you pass away, the funds in your 403(b) plan typically pass to your designated beneficiaries. Depending on the beneficiaries' relationship to you and the plan's rules, they may have options such as rolling the funds into an inherited IRA or taking a lump-sum distribution.

Please note that the information provided in this FAQ is based on general guidelines, and specific rules and regulations may vary depending on the particular 403(b) plan and your individual circumstances. It is recommended to consult with a financial advisor or plan administrator to get personalized advice regarding your retirement savings and investment strategy.


In conclusion, the 403(b) plan serves as a vital retirement savings tool for employees of nonprofit organizations, public educational institutions, and religious entities. It offers tax advantages, employer matching contributions, and diverse investment options to help participants secure a financially stable retirement. Understanding the intricacies of the 403(b) plan and making well-informed decisions are crucial steps toward achieving long-term financial security in retirement.