What Is a 403(b) Plan?

Definition and Examples of a 403(b) Plan

Definition

A 403(b) plan is a tax-sheltered annuity (TSA) plan. This type of plan is offered to employees of tax-exempt organizations. Employers might offer these retirement savings plans as part of an employee's benefits package. A 403(b) plan can actually benefit both parties.

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Definition and Example of a 403(b) Plan

A 403(b) plan is a type of employer-sponsored retirement plan. Employees can have their employers defer portions of their pay to these retirement accounts so that these earnings won't be subject to income tax until the money is later withdrawn. Employers can match employees' contributions.

  • Alternate name: tax-sheltered annuity
  • Acronym: TSA plan

Only specific types of employers are allowed to offer a 403(b) plan to employees. Eligible employers must be tax-exempt organizations, such as:

  • Churches
  • Nonprofit hospitals
  • Public schools or universities
  • 501(c)(3) charitable organizations

How Does a 403(b) Plan Work?

Just as with a 401(k) plan, you will have options for how to invest your money in a 403(b) plan. You can choose conservative, middle-, or high-risk investments.

Your employer may offer a "match" to encourage employees to save for retirement. They may equal your contributions, up to a certain percentage of your salary. If your employer offers a 9% match, then if you were to invest 9% of your salary, your employer would also put an equal amount in your 403(b) plan. If you were to put in only 4%, your employer would match that amount. However, if you were to put in 12%, your employer would only match up to 9%.

A 403(b) is a tax-advantaged savings plan. Pre-tax contributions and earnings on these amounts are not taxed until they're distributed from the plan. Money in a 403(b) can grow tax-deferred for decades. You will only pay taxes on the funds when you begin to take withdrawals from your 403(b). If your total income falls within certain limits, you also may be able to take the Savers Credit for contributions to your 403(b) when you file your taxes.

If you have a 403(b), you can take loans against it if you need cash in an emergency, but 403(b) loans must be paid back, just like their 401(k) counterparts. Otherwise, you will face significant tax consequences.

Note

You can balance your 403(b) portfolio between riskier and safer investments by talking to a human resources representative at your company. You might also consult a financial advisor.

You own your 403(b) plan when you're vested in it, which means that you've been with your employer for a specific length of time. (The length of time can vary, depending on your employer and the rules of your plan.) The percentage of your vesting increases with each additional year of employment. Your employer can't take back any contributions they've made if you're 100% vested.

You can take the money with you if you change jobs after you're vested in the plan, but you might have to roll it over into an IRA account. If you leave your job before you're vested, you'll lose your employer’s contributions, but you'll keep the money that you've personally put into your plan. Any contributions that you personally make to the plan are always 100% vested (i.e., owned by you).

Some employers will require that you roll the account over, while others will allow you to stay with your current plan as long as you have a specific balance in the account. Your human resources representative should be able to answer your questions or connect you with someone who can.

403(b) Plans vs. 401(k) Plans

These TSA plans are similar to 401(k) plans, but there are some differences.

403(b) Plans 401(k) Plans
Tax-exempt organizations For-profit companies.
Employer match available Employer match subject to ERISA rules
Investment options limited to annuities and mutual funds Investment options include annuities, mutual funds, stocks, and bonds

How Much Can You Contribute to a 403(b)?

The federal government provides fairly high 403(b) contribution limits. These numbers are increased most years to account for inflation. The total contributions to your 403(b) in 2022 (made by both you and your employer) can equal the lesser of:

  • $61,000
  • 100% of your total compensation for your most recent year of employment with that employer

If you have been with your employer for 15 years or more, you also have the option to make catch-up contributions, which can increase the amount of your salary you can contribute by the lesser of:

  • $3,000
  • $15,000, reduced by the value of any additional contributions you made in previous years because of this rule
  • $5,000 times the number of your years of service with the organization, minus the total of any contributions you made in previous years

If your plan permits, and if you are 50 years of age or older, you can make another component of catch-up contributions. In 2022, you can add another $6,500 to your 403(b) plan.

You should aim to save around 15% of your income for retirement each year. Your employer match also counts toward that total.

Note

You should always take full advantage of your employer match. It is part of the compensation that is offered for your position, just like your salary and other benefits.

Consider investing in your 403(b) plan up to the full amount that your employer matches. You might increase the amount of your contributions each time you get a raise, and then max out your IRA contributions. Then you can return to your 403(b) until you've reached the 15% goal if you still have funds you'd like to invest for retirement.

Key Takeaways

  • A 403(b) plan is a tax-sheltered annuity plan offered by tax-exempt employers.
  • Contributions you make to a 403(b) plan aren’t taxed until you withdraw the money. Your investment grows tax-deferred.
  • These plans are similar to 401(k) plans, but investments are limited to annuities and mutual funds.
  • There are contribution limits, but they're fairly generous, and they inch upward each year to keep pace with inflation. 
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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Internal Revenue Service. "IRC 403(b) Tax-Sheltered Annuity Plans."

  2. Internal Revenue Service. "Retirement Plans FAQs Regarding 403(b) Tax-Sheltered Annuity Plans."

  3. Internal Revenue Service. "Publication 571 (01/2020), Tax-Sheltered Annuity Plans (403(b) Plans)."

  4. Internal Revenue Service. "Hardships, Early Withdrawals and Loans."

  5. Internal Revenue Service. "Retirement Topics - Vesting."

  6. Investor.gov. "Switching Jobs."

  7. Internal Revenue Service. "Retirement Topics - 403(b) Contribution Limits."

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