403(b) Guide: How It Works for Teachers & Nonprofit Employees
How a 403(b) Works
You authorize your employer to withhold a percentage of each paycheck and deposit it into your 403(b) account. Pre-tax contributions reduce your taxable income in the year you make them. The money grows tax-deferred until you withdraw it in retirement, when it is taxed as ordinary income. If your plan offers a Roth option, you contribute after-tax dollars and qualified withdrawals are completely tax-free.
Many 403(b) plans offer an employer match, though it is less common and typically less generous than in the private sector. Public school teachers, for example, often receive no employer match — making it even more important to maximize your own contributions.
403(b) Contribution Limits (2024)
| Contribution Type | 2024 Limit |
|---|---|
| Employee deferral (under 50) | $23,000 |
| Catch-up (age 50+) | Additional $7,500 |
| 15-year service catch-up | Additional $3,000/year (up to $15,000 lifetime) |
| Total combined max (employer + employee) | $69,000 |
The 15-Year Rule
Unique to 403(b) plans: if you have worked for the same eligible employer for at least 15 years and your average annual contribution has been less than $5,000, you can contribute an extra $3,000 per year — up to a $15,000 lifetime maximum. This stacks with the age 50+ catch-up, allowing long-tenured employees to contribute up to $33,500 in employee deferrals.
403(b) vs 401(k)
| Feature | 403(b) | 401(k) |
|---|---|---|
| Eligible employers | Public schools, nonprofits, churches, hospitals | Private-sector companies |
| Employee deferral limit | $23,000 (same) | $23,000 (same) |
| Catch-up (50+) | $7,500 (same) | $7,500 (same) |
| 15-year service catch-up | Yes — extra $3,000/year | No |
| Investment options | Often annuities + limited mutual funds | Typically broad mutual fund/ETF menu |
| Employer match | Less common | Common (often 3%–6%) |
| Roth option | Yes (if plan offers it) | Yes (if plan offers it) |
| Loan provision | Yes | Yes |
| ERISA coverage | Government/church plans often exempt | Generally covered |
Investment Options in 403(b) Plans
Historically, 403(b) plans were limited to annuity contracts — which is why they are sometimes called “tax-sheltered annuities” (TSAs). Today, most 403(b) plans offer mutual funds alongside annuity options, but the investment menu is often more limited than a typical 401(k).
Watch out for high-cost variable annuities within your 403(b). Some plans still default participants into annuity products with annual fees of 1.5%–2.5% or more, plus surrender charges if you try to move your money. Always check the expense ratios and compare them to low-cost index fund alternatives if your plan offers them.
Withdrawal Rules
403(b) withdrawal rules mirror 401(k) rules. Withdrawals before age 59½ are subject to a 10% early withdrawal penalty plus ordinary income tax. Exceptions include separation from service at age 55 or older (the Rule of 55), substantially equal periodic payments (72(t)), and hardship withdrawals.
Required minimum distributions (RMDs) begin at age 73. Roth 403(b) balances are no longer subject to RMDs starting in 2024 under SECURE 2.0.
Rollovers
When you leave your employer, you can roll your 403(b) into a traditional IRA, a new employer’s 401(k) or 403(b), or leave it in the existing plan. Rolling to an IRA typically gives you the broadest investment options and lowest costs. Roth 403(b) balances can roll into a Roth IRA.
Key Takeaways
- 403(b) plans work like 401(k)s but are designed for public schools, nonprofits, hospitals, and churches.
- Contribution limits are identical to 401(k)s ($23,000 + $7,500 catch-up), with a bonus 15-year service catch-up of $3,000/year unique to 403(b)s.
- Investment menus are often more limited — watch out for high-cost annuity products.
- If you also have access to a 457(b) plan, you can contribute the maximum to both — doubling your tax-advantaged savings.
- When leaving your employer, rolling into a low-cost IRA usually provides better investment choices and lower fees.
Frequently Asked Questions
Can I have a 403(b) and a Roth IRA?
Yes. Your 403(b) contributions and Roth IRA contributions are governed by separate limits. You can max out both if your income allows Roth IRA eligibility.
Is a 403(b) better than a 401(k)?
The plans are structurally similar. The 403(b) has the advantage of the 15-year service catch-up, but often has worse investment options and less generous employer matches. The plan quality depends more on the specific provider and investment menu than the plan type itself.
What is a 403(b)(7) vs a 403(b)(1)?
A 403(b)(1) is an annuity contract — the original form of the plan. A 403(b)(7) is a custodial account that holds mutual funds. The 403(b)(7) is generally preferred because mutual funds tend to have lower fees and greater transparency than annuity contracts.
Can I contribute to both a 403(b) and a 457(b)?
Yes — and this is one of the biggest advantages for public-sector employees. The deferral limits are separate for each plan, allowing up to $46,000 in combined employee deferrals ($23,000 each), plus catch-up contributions if eligible.
What happens to my 403(b) if I switch to a private-sector job?
You can leave the money in the 403(b), roll it to your new employer’s 401(k) (if they accept rollovers), or roll it into a traditional IRA. Most people benefit from rolling into a low-cost IRA for better investment options and fee control.