403(b) Plan

A 403(b) plan is a retirement savings account for employees of public schools, universities, hospitals, and nonprofit organizations. It operates much like a 401(k), but with less regulation, more restricted investment options (often annuities or mutual funds only), and no employer match requirement. The plan owes its name to the IRS tax code section authorizing it.

A lighter-touch plan for nonprofits and schools

Congress created the 403(b) in 1958 to let teachers and nonprofit staff save for retirement via payroll deduction. The original vehicles were annuity contracts—you would buy an insurance annuity that grew tax-deferred and paid you income in retirement. Over time, the rules were loosened to allow mutual funds and a wider range of vendors. Today, a 403(b) is often indistinguishable from a 401(k) in substance, but it carries much lighter regulatory baggage.

Unlike a 401(k), a 403(b) does not require an employer to file Form 5500 with the Department of Labor annually, perform non-discrimination testing to ensure wealthy employees do not save disproportionately, or maintain complex written plan documents. An employer can offer a 403(b) with minimal compliance overhead. This simplicity appeals to schools and nonprofits with tight budgets but makes the plans harder to navigate for employees.

Investment options are limited, often to annuities or mutual funds

A traditional 401(k) offers a range of mutual funds and exchange-traded funds, chosen by the employer and rolled out in an employee-friendly menu. A 403(b) may offer that same selection, but many plans—especially older ones—restrict you to annuity contracts or a handful of mutual funds sold by a single vendor.

This is a hangover from the plan’s origins. A 403(b) annuity contract is a promise from an insurance company to take your contributions, invest them, and pay you guaranteed or variable income in retirement. Some are fixed annuities (guaranteed returns) and some are variable (your returns depend on underlying investment performance). The insurance company takes a cut for issuing and administering the annuity, often via annual fees of 1% or higher—significantly steeper than a low-cost index fund.

A few large employers have modernized their 403(b)s to offer a brokerage window—a self-directed option where you can buy any publicly traded security. But this is rare. Most 403(b) participants are stuck choosing among a pre-selected list of annuities and mutual funds, some of which are mediocre or expensive.

No required employer match, but some do contribute

Unlike a 401(k), a 403(b) does not obligate the employer to contribute anything. You can have a 403(b) with employee deferrals only and no employer match. Many schools and nonprofits take advantage of this to keep costs low. However, some larger employers do offer a match (commonly 2–5% of salary) to attract and retain staff.

When the employer does contribute, it typically goes to the same investment vehicles as employee deferrals—the same annuity or mutual fund options. Some 403(b) plans split the employer match into a separate “money-purchase” subaccount, but the mechanics are the same.

Contribution limits are the same as 401(k)s

You can defer up to roughly $23,500 per year (as of 2024) into a 403(b), the same cap as a 401(k). At age 50, you get a $7,500 catch-up contribution, bringing the total to $31,000. Additionally, employees with 15 years of service at the same employer can make an extra $3,000 per year “catch-up” contribution (this applies to 403(b)s and 457(b) plans, but not 401(k)s).

This higher ceiling for tenured nonprofit and school staff reflects the reality that many have been underpaid relative to the private sector and need to catch up on retirement savings late in their careers.

Vesting: yours immediately, employer’s per plan

Your own deferrals to a 403(b) vest immediately—they are always yours, no matter when you leave. An employer match or contribution vests according to the plan’s terms. Many nonprofits use immediate vesting (you own the match right away), while others use a graded schedule over 3–5 years.

If you leave the employer before the match vests, you lose the unvested portion. When you leave, you can roll your vested 403(b) balance to a traditional IRA, a 401(k) at a new employer, or another 403(b). The same pro-rata rule applies: if your 403(b) includes pre-tax and after-tax (Roth) money, the split follows you to the new plan.

Legacy annuities are hard to shed

Many 403(b) plans are grandfathered—they hold old annuity contracts from before the mutual fund option was added. These annuities often charge high fees (1.5%–2% annually or more), carry surrender charges if you want out within 5–10 years, and offer mediocre returns. Employees are stuck because switching out means paying a penalty or resigning themselves to slow wealth growth.

If you have a 403(b) with a legacy annuity, ask your employer’s benefits team whether a mutual fund or brokerage option exists within the plan. If not, and if you have left the employer, you can roll the annuity to an IRA and invest it more cheaply. If you are still employed, rollovers in-plan (while working) may be restricted, but this varies. The best long-term move is often to roll to an IRA after separation.

Loans and early withdrawals follow familiar rules

You can borrow from a 403(b) if the plan permits it (many do). The limit is typically 50% of your vested balance, capped at $50,000. Repayment is usually over five years via payroll deduction. Early withdrawal before 59½ incurs a 10% penalty plus income tax, with standard exceptions (hardship, substantially equal payments, disability, death).

One quirk: if your 403(b) holds an annuity contract, the loan or withdrawal rules may be stricter than a mutual fund option. Some insurers do not allow loans or charge high fees. Again, this reflects the plan’s flexibility—different employers and vendors have different terms.

When to contribute to a 403(b)

A 403(b) is ideal if you work for a school, university, hospital, or nonprofit and have access to one. The tax deferral and employer match (if offered) are powerful. The challenge is the investment menu. If your plan offers a solid roster of low-cost mutual funds or a brokerage window, max it out. If you are saddled with expensive annuities and mutual funds, contribute enough to get the employer match (free money), then max out a traditional IRA or backdoor Roth instead.

Many educators and nonprofit workers maintain both a 403(b) and an IRA or 457(b) plan, diversifying their options and avoiding the vendor lock-in of a single 403(b).

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