403(b)
403(b)
Quick Definition
A 403(b) plan is a tax-advantaged retirement savings account available to employees of public schools, colleges, universities, hospitals, churches, and other 501(c)(3) nonprofit organizations. It functions similarly to a 401(k) but is governed by different IRS rules and historically has offered a narrower selection of investment products.
What It Means
If you work as a teacher, nurse, university administrator, social worker, or employee of a nonprofit, your workplace retirement plan is almost certainly a 403(b). The name refers to the section of the Internal Revenue Code that authorizes these plans, just as "401(k)" refers to its own code section.
The core tax benefit is the same as a 401(k): contributions are made with pre-tax dollars, reducing your taxable income in the year you contribute. Investments grow tax-deferred, and you pay ordinary income tax only when you withdraw in retirement.
What makes 403(b) plans distinct is their history and regulatory environment. Until 2023, 403(b) plans were subject to fewer ERISA oversight requirements than 401(k) plans, which is why many 403(b) plans historically offered primarily annuity products rather than mutual funds. The SECURE 2.0 Act of 2022 brought 403(b) plans closer to parity with 401(k) plans, but differences remain.
How It Works
2026 Contribution Limits
According to IRS Notice 2025-67, the 403(b) limits for 2026 match the 401(k) limits:
| Contributor | Annual Limit |
|---|---|
| Employee (under 50) | $24,500 |
| Employee (age 50-59, 64+) | $32,500 ($24,500 + $8,000 catch-up) |
| Employee (age 60-63) | $35,750 ($24,500 + $11,250 enhanced catch-up) |
| Combined employee + employer | $72,000 |
The 402(g) elective deferral limit is shared across all employer plans. If you contribute to both a 403(b) and a 401(k) at different jobs, your total employee contributions across both plans cannot exceed $24,500 in 2026.
New for 2026: Mandatory Roth Catch-Up for High Earners
The same SECURE 2.0 Roth catch-up rule that applies to 401(k) plans also applies to 403(b) plans. Starting January 1, 2026, participants who earned more than $150,000 in FICA wages from the employer sponsoring the plan in 2025 must make all catch-up contributions on a Roth basis. The 15-year service catch-up is exempt from this requirement, but the age-based catch-up is not.
The 15-Year Rule: A Unique 403(b) Benefit
Employees with 15 or more years of service with the same qualifying employer may be eligible for an additional catch-up contribution of up to $3,000 per year, with a lifetime maximum of $15,000. This benefit is exclusive to 403(b) plans and does not exist in 401(k) plans.
When both the 15-year catch-up and the age-50 catch-up are available, the IRS requires deferrals exceeding the standard limit to be applied first to the 15-year catch-up (to the extent permitted), then to the age-50 catch-up.
Eligibility check: You qualify if you have worked for the same public school system, hospital, home health service agency, health and welfare service agency, church, or convention/association of churches for at least 15 years.
Investment Options: The Annuity Problem
Historically, 403(b) plans were dominated by annuity products sold by insurance companies. This created a structural problem for participants:
| Investment Type | Typical Expense Ratio | Common in 403(b)? |
|---|---|---|
| Index mutual fund | 0.03% to 0.20% | Increasingly yes |
| Actively managed fund | 0.50% to 1.50% | Yes |
| Variable annuity | 1.00% to 3.00%+ (plus surrender charges) | Historically dominant |
| Fixed annuity | Varies | Yes |
Many teachers and nonprofit workers unknowingly paid 2 to 3% in annual fees through annuity products, dramatically reducing their retirement savings. A 2% annual fee on a $200,000 account costs $4,000 per year and compounds into hundreds of thousands of dollars in lost retirement wealth over a career.
What to Do
- Request the fee disclosure document (required by law under ERISA)
- Look for mutual fund options, especially from Fidelity, Vanguard, or TIAA
- Compare expense ratios and choose the lowest-cost options available
- Consider rolling old 403(b) assets to an IRA when you change employers
403(b) vs. 401(k): Key Differences
| Feature | 403(b) | 401(k) |
|---|---|---|
| Who it covers | Public schools, nonprofits, hospitals | Private-sector employers |
| Contribution limits | Same ($24,500 in 2026) | Same |
| Employer match | Available but less common | Very common |
| 15-year catch-up | Yes (up to $3,000/year extra) | No |
| Investment options | Historically annuity-heavy, improving | Broad fund selection |
| ERISA oversight | Partial (churches exempt) | Full |
| Roth catch-up mandate (2026) | Yes (excludes 15-year catch-up) | Yes |
Roth 403(b)
Like the Roth 401(k), many 403(b) plans now offer a Roth option where contributions are made with after-tax dollars. Qualified withdrawals in retirement are completely tax-free, including all earnings. This is especially valuable for younger employees in lower tax brackets who expect to be in higher brackets in retirement.
Real-World Example: Teacher's 403(b) Over a Career
Maria is a public school teacher, age 28, earning $52,000/year. She contributes 7% of her salary ($3,640/year) to her 403(b). Her school district matches 50% up to 6% of salary ($1,560/year).
Projections at 7% average annual return:
| Age | Years Invested | Maria's Contributions | District Match | Total Balance |
|---|---|---|---|---|
| 38 | 10 | $36,400 | $15,600 | ~$74,000 |
| 48 | 20 | $72,800 | $31,200 | ~$230,000 |
| 58 | 30 | $109,200 | $46,800 | ~$567,000 |
| 65 | 37 | $134,680 | $57,720 | ~$940,000 |
Maria's roughly $134,000 in personal contributions grows to nearly $1 million through the employer match and compound interest over 37 years.
Stacking a 403(b) with a 457 Plan
One major advantage for public school and nonprofit employees is the ability to contribute to both a 403(b) and a 457 plan simultaneously. This effectively doubles the annual tax-deferred contribution limit.
A state university employee could contribute:
- $24,500 to their 403(b) plan
- $24,500 to their 457(b) plan
- Total: $49,000 in tax-deferred savings per year
This double-stacking capability is one of the best retirement savings opportunities in the tax code for eligible employees.
Key Points to Remember
- The 403(b) is the retirement plan for education and nonprofit workers, with the same 2026 contribution limits as a 401(k) ($24,500)
- The 15-year service catch-up is a unique extra benefit worth up to $3,000 per year for long-tenured employees
- Watch out for high-fee annuity products inside 403(b) plans; request fee disclosures and seek low-cost mutual fund options
- Employer matching is available in many 403(b) plans but is not as universally offered as in the private sector
- SECURE 2.0 gave 403(b) plans the ability to offer collective investment trusts (CITs), which are often lower-cost than mutual funds
- Starting in 2026, high earners (over $150,000 in prior-year FICA wages) must make age-based catch-up contributions as Roth
- You can stack a 403(b) with a 457 plan to double your annual tax-deferred savings
Common Mistakes to Avoid
- Accepting the default annuity without reviewing fees: Always compare expense ratios across all available options. The default could be costing you 2% or more per year.
- Not taking advantage of the 15-year catch-up: Many long-tenured employees are unaware this benefit exists. Check with your HR department if you have 15+ years of service.
- Leaving old 403(b) accounts behind: Consolidate old accounts into an IRA or new employer's plan for easier management and potentially lower fees.
- Not contributing enough for the employer match: Free money left uncollected is the most expensive retirement mistake you can make.
- Missing the 457 stacking opportunity: If your employer offers both a 403(b) and a 457(b), you can contribute the maximum to both. Many employees do not realize this.
- Ignoring the Roth catch-up rule: If you earned over $150,000 in 2025 FICA wages, your 2026 age-based catch-up contributions must go into a Roth account. Plan accordingly.
Frequently Asked Questions
Q: Can I have both a 403(b) and an IRA? A: Yes. You can contribute to a 403(b) up to the annual limit and also contribute to a Roth IRA or traditional IRA (subject to income limits), effectively saving in two tax-advantaged buckets simultaneously.
Q: What if my employer does not offer a match? A: Many public school districts and nonprofits do not offer employer matching. In that case, contribute enough to lower your tax bill and maximize your own long-term growth. Also consider contributing to an IRA alongside your 403(b).
Q: Are church 403(b) plans different? A: Yes. Church plans are often exempt from ERISA, which means they have fewer mandatory disclosures and protections than plans covered by ERISA. If you work for a religious organization, verify whether your plan is ERISA-covered.
Q: Can I roll a 403(b) into an IRA when I retire? A: Yes. When you leave your employer or retire, you can roll your 403(b) balance into a traditional IRA (for pre-tax funds) or Roth IRA (for Roth 403(b) funds) without paying taxes, as long as you complete a direct rollover within 60 days.
Q: Can I contribute to both a 403(b) and a 401(k) if I change jobs mid-year? A: The $24,500 elective deferral limit for 2026 is shared across all 401(k), 403(b), and SARSEP plans. Your total employee contributions across all such plans cannot exceed $24,500. However, 457(b) plans have a separate limit, so you can max out a 403(b) or 401(k) and still contribute $24,500 to a governmental 457(b).
Related Terms
401(k)
A 401(k) is an employer-sponsored retirement plan that lets you invest pre-tax dollars, reducing taxable income while building long-term wealth with potential employer matching.
457 Plan
A 457 plan is a tax-deferred retirement savings plan for state and local government employees and certain nonprofit workers, offering unique early withdrawal flexibility with no 10% penalty.
IRA
An IRA is a personal tax-advantaged retirement savings account that lets individuals invest independently of their employer, with traditional IRAs offering tax-deferred growth and Roth IRAs offering tax-free growth.
Keogh Plan
A Keogh plan is a tax-deferred retirement account for self-employed individuals and unincorporated businesses, offering high contribution limits similar to corporate pension plans before being largely superseded by SEP IRAs and Solo 401(k)s.
Roth IRA
A Roth IRA is a tax-advantaged retirement account where contributions are made with after-tax dollars, allowing all future growth and qualified withdrawals to be completely tax-free.
SEP IRA
A SEP IRA (Simplified Employee Pension) is a high-contribution retirement account for self-employed individuals and small business owners, allowing contributions up to 25% of compensation or $72,000 per year.
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