403b:
Definition, Benefits, Comparison & Types

A 403(b) plan (also called a tax-sheltered annuity or TSA plan) is a retirement plan offered by public schools and certain 501(c)(3) tax-exempt organizations. Employees save for retirement by contributing to individual accounts, typically through pre-tax salary deferrals that reduce their current taxable income. The plan allows money to grow tax-deferred until distributed, meaning earnings on investments are not taxed until withdrawn in retirement.

A 403(b) operates similarly to a 401(k) plan maintained by for-profit entities, but is specifically designed for employees in education, healthcare, religious organizations, and other charitable tax-exempt entities. Public school systems, churches, hospitals, nonprofits, and certain ministers are among those eligible to participate in these plans.

Related terms: 401(k) plan, tax-sheltered annuity (TSA), defined contribution plan, ERISA

Employees eligible to participate in a 403(b) plan include those working for tax-exempt organizations established under IRC Section 501(c)(3), public school system employees involved in day-to-day school operations, employees of cooperative hospital service organizations, civilian faculty and staff of the Uniformed Services University of the Health Sciences (USUHS), employees of public school systems organized by Indian tribal governments, and certain ministers.

Ministers are eligible if they are employed by Section 501(c)(3) organizations, are self-employed ministers (treated as employed by a tax-exempt organization), or are chaplains employed by non-501(c)(3) organizations who function as ministers in their day-to-day professional responsibilities. The universal availability rule requires that if an employer permits one employee to defer salary into a 403(b) plan, the employer must extend this offer to all employees of the organization, with limited exceptions.

Employers may exclude employees who will contribute $200 or less annually, those participating in a 401(k) or 457(b) plan or another 403(b) plan of the employer, nonresident aliens, employees who normally work less than 20 hours per week, and students performing services described in IRC Section 3121(b)(10).

For 2025, employees under age 50 can contribute up to $23,500 to a 403(b) account, and the limit rises to $24,500 for 2026. The maximum combined amount both the employer and employee can contribute annually is $70,000 for 2025 and increases to $72,000 for 2026, or the employee's includible compensation for their most recent year of service, whichever is less.

Employees aged 50 or older are eligible for catch-up contributions of up to an additional $7,500 in 2025 and $8,000 in 2026. Those between ages 60 and 63 can contribute up to $11,250 as a "super" catch-up contribution if the plan allows it. Starting in 2026, employees with 2025 wages greater than $150,000 must make their catch-up contributions to a Roth balance, meaning high earners may no longer receive an upfront tax break when making catch-up contributions.

Employees who have worked for the same employer offering the 403(b) plan for at least 15 years may be able to save up to an extra $15,000 in up to $3,000 installments over different years, provided the plan documents allow for it. This 15-year rule gives 403(b) plans an additional contribution opportunity beyond what 401(k) plans offer.

A 403(b) allows employees to set aside money for retirement directly from their paycheck. Contributions are typically made on a pre-tax basis, reducing current taxable income, and investments grow tax-deferred until withdrawal. Some employers also offer Roth 403(b) options, which let employees contribute after-tax dollars in exchange for tax-free qualified withdrawals, including investment earnings.

Employers may contribute to employee accounts through matching contributions or non-elective contributions, though this is not required. Employees can invest their contributions and any employer contributions in assets like mutual funds and annuities offered through the plan. The automation of contributions makes saving for retirement simple by deducting amounts directly from each paycheck without the money ever hitting the employee's bank account.

Many 403(b) plans now include automatic enrollment, which adds eligible employees to the plan unless they opt out, and auto-escalation, which gradually increases contributions over time. These features reduce decision fatigue, improve participation rates, and help employees save more consistently over their careers.

403(b) plans provide significant tax advantages for participants. Contributions to traditional 403(b) accounts are made with pre-tax dollars, which reduces current taxable compensation. Earnings on these contributions grow tax-deferred, meaning no taxes are due until the money is withdrawn in retirement. This tax deferral allows investments to potentially grow faster than in a similar taxed account because taxes are not continuously reducing the account balance.

Plans that offer Roth 403(b) options allow employees to make after-tax contributions. Qualified distributions from Roth 403(b) accounts are federally tax-free and penalty-free, provided the five-year aging requirement has been satisfied and one of the following conditions is met: age 59½, disability, or death. This means employees pay taxes on contributions now but receive all earnings completely tax-free in retirement.

Employees can make penalty-free withdrawals from a 403(b) once they reach age 59½, though they will still owe income taxes if they made pre-tax contributions. Before age 59½, withdrawals typically incur a 10% early-withdrawal penalty plus any applicable income taxes, except in specific situations such as death, permanent disability, qualified domestic relations orders (QDROs), separation from service after age 55, certain qualified disaster distributions, and terminal illness diagnosis.

Recent legislative changes expanded withdrawal options to include limited emergency withdrawals for financial emergencies up to $1,000 per year without penalties or mandatory repayment. Many 403(b) plans also allow hardship withdrawals in specific cases such as preventing eviction or covering medical emergencies, subject to strict IRS guidelines. Some plans offer loan provisions, allowing employees to borrow up to 50% of the account value or $50,000, whichever is less, and repay it with interest over time.

If employment changes and a loan cannot be repaid, it is considered a withdrawal, and the employee may owe taxes and a 10% penalty if under age 59½. Employees should review their plan's specific provisions with the plan administrator to understand all available withdrawal options and restrictions.

Like traditional IRAs and all other workplace retirement accounts, 403(b) plans require participants to begin taking minimum distributions at age 73, though some long-standing plans may have an extension to age 75. If the participant is still working for the organization that holds the 403(b), they can delay withdrawing assets in that 403(b) plan until they retire.

RMDs are calculated based on the participant's total retirement account balance and IRS-calculated life expectancy. The first RMD must be taken no later than April 1 of the year following the year the participant reaches the required age. Contributions to 403(b) accounts from prior to 1987 that have been separately accounted for do not need to be included in RMD calculations until the later of the year the participant turns 75 or April 1st of the year after retirement, though earnings and gains related to pre-1987 contributions must be included from the beginning.

Failing to take the required RMD results in a penalty of 25% of the amount not withdrawn in addition to potential taxes on the amount when eventually withdrawn. This penalty can be reduced to 10% with a withdrawal of the unwithdrawn RMD amount within 2 years. RMDs do not apply to 403(b) Roth accounts.

A 403(b) plan may allow 4 types of contributions. Elective deferrals are employee contributions made under a salary reduction agreement, allowing employers to withhold money from employee salaries and deposit it into 403(b) accounts. Nonelective employer contributions include matching contributions, discretionary contributions, and certain mandatory contributions made by the employer other than those made under salary reduction agreements.

After-tax contributions (voluntary contributions that are not designated Roth contributions) are made by employees, reported as compensation in the year contributed, and included in gross income for income tax purposes. Designated Roth contributions are elective deferrals that employees elect to include in gross income, with the plan keeping separate accounting records for all contributions, gains, and losses in the designated Roth account.

Assets in a 403(b) plan can be placed in an annuity contract provided through an insurance company, a custodial account invested in mutual funds, or a retirement income account set up for church employees that can be invested in either annuities or mutual funds. 403(b) plans cannot be funded with life insurance issued after September 24, 2007, endowment, health, accident, or other types of insurance contracts.

Typically, a 403(b) plan lets participants choose among investment funds offered under the plan, often ranging from very conservative to aggressive growth options. The employer is responsible for ensuring the plan complies with all legal requirements and should verify that there is no conflict between the terms of the 403(b) plan and the provisions of any annuity contract or custodial account agreement under the plan.

The universal availability rule means that if an employer permits one employee to defer salary into a 403(b) plan, the employer must extend this offer to all employees of the organization. Universal availability also requires the plan to give meaningful notice to employees of their right to make elective deferrals, including information about when to make an election and when and how often during the year they can change that election.

A 403(b) plan generally may not place conditions on an employee's right to make elective deferrals. For example, the plan sponsor cannot require that an employee take out a certain level of health insurance before being allowed to make elective deferrals to the 403(b) plan.

A 403(b) plan must be maintained under a written program which contains all the terms and conditions for eligibility, benefits, limitations, the form and timing of distributions and contracts available under the plan, and the party responsible for plan administration. The written plan requirement does not mean that the plan must be contained in a single document. The plan can consist of multiple documents containing various plan provisions regarding salary reduction agreements, contracts that fund the plan, eligibility rules, how the plan will pay benefits, and nondiscrimination rules.

Church plans that do not contain any retirement income accounts are exempt from having a 403(b) written plan. The deadline for 403(b) plan sponsors to adopt new written plans or amend their existing written plans was December 31, 2009, with the plans effective January 1, 2009.

A 403(b) plan may, but is not required to, allow loans. If permitted by the plan, employees may obtain a loan to the extent and in the manner allowed by the plan. Participants can typically borrow up to 50% of their account value or $50,000, whichever is less. The loan must be repaid with interest over time according to the plan's terms.

Employees should keep in mind that they still have to pay themselves back, including interest, and will miss out on potentially years of compound returns while the money is out of the account. If employment changes, the loan must be repaid by the time taxes are filed for the year employment was lost or left, or potentially even less time depending on the plan's guidelines. If the loan cannot be repaid, it is considered a withdrawal, and taxes and a 10% penalty may apply if the participant is under age 59½.

An employer sponsoring a 403(b) plan may terminate the plan and distribute accumulated benefits to participants and beneficiaries on termination if allowed by the terms of the plan. To terminate a 403(b) plan, the plan sponsor must adopt a binding resolution establishing a plan termination date, ceasing plan contributions, fully vesting all benefits on the termination date, and authorizing the distribution of all benefits as soon as administratively practicable after the termination date.

The employer must generally stop contributions by the sponsor or any related entity to any other 403(b) plan during the period that begins on the termination date and ends 12 months after all benefits have been distributed from the terminated plan. The plan sponsor must notify all plan participants and beneficiaries about the plan's termination, provide a 402(f) rollover notice, and distribute all plan assets within 12 months of the plan's termination date to participants and beneficiaries in accordance with Rev. Rul. 2011-7. 403(b) plans subject to ERISA may have to comply with additional requirements.

A 403(b) is often compared to 3 related retirement plan types:

403(b) vs. 401(k) plan

403(b) vs. IRA

403(b) vs. 457(b) plan