What Is a 403(b) Retirement Plan?

A 403(b) retirement plan is a tax-deferred retirement savings account available to certain employees. Tax-deferred means you don’t have to pay income taxes on the money you put into it, but you should expect to pay taxes on the money you withdraw later.

When you enroll in a 403(b) plan, you can opt to have your employer withhold a portion of your paycheck and have it redirected to the plan. Your employer can also elect to contribute to your plan.

These contributions live in invested annuity contracts or mutual fund custodial accounts — a brokerage account that invests in mutual funds, stocks and bonds.

403(b) plans automatically receive a portion of your paycheck so it can grow tax deferred. Sometimes, your employer will match your contribution up to a certain percentage.

You can also choose to invest in a few select options. 403(b) plans serve as a well-rounded savings account as part of a retirement plan.

Roth 403(b) plans and traditional 403(b) plans have different tax and required minimum distribution (RMD) rules.

Traditional 403(b)s give you a tax break upfront, while Roth 403(b)s make your withdrawals tax-free, meaning you get your tax break later on.

Traditional 403(b)s require you to take RMDs once you turn 73. The money taken out of your account will be taxable.

Roth 403(b)s currently call for RMDs once the owner of the account dies. However, starting in 2024, RMDs won’t be required for Roth 403(B) accounts at all.

The types have similar pros and cons, despite having tax and RMD differences.

Contribution limits for 403(b) plans are the same as for 401(k) plans. You’re allowed to invest up to $22,500 in a 403(b) plan in 2023. The IRS caps your contributions and your employer’s contributions at $66,000 for the year.

If you’re aged 50 or older, you can make “catch-up” contributions — up to $7,500 in 2023. Your annual contribution limit is $30,000.

If you work for certain nonprofits and have 15 years of service, you could make smaller catch-up contributions even if you are younger than 50.

When comparing a 403(b) plan to other retirement accounts — like a 401(k), 457(b) or Roth IRA — it’s important to consider your tax goals, desired investment options, the institution offering the plan and contribution limits.

The major difference between a 401(k) and a 403(b) plan is based on where you work. A 403(b) plan will be offered by certain tax-exempt nonprofit organizations. A 401(k) plan will be offered by for-profit companies and organizations.

There are other differences to consider. In rare cases, employers may offer both a 401(k) plan and a 403(b) plan to their employees. In those cases, you and your employer may contribute to both plans.

457(b) plans and 403(b) plans have the same purpose — to grow your retirement savings tax deferred. But the two plans have different tax rules and penalties.

For example, both plans shelter contributions from capital gains taxes, meaning you’ll only pay taxes on withdrawals. They both typically only offer annuities and mutual funds as investment products.

Consider the similarities and differences between a 457(b) and 403(b) plan before opening an account.

Roth IRAs are more accessible, have no RMDs (starting in 2024) and offer a wider range of investment products when compared to a 403(b) plan. Roth IRAs also offer tax advantages with your withdrawals instead of offering upfront tax advantages like a 403(b) plan.

Consider the pros and cons of each account to determine which fits your needs.