A 403(b) is the retirement planning vehicle used by not-for-profit or other tax-exempt employers of nurses, doctors, teachers, professors, school personnel, researchers, clergy, and some governmental organization workers. 403(b) plans are named after the section of the Internal Revenue Service (IRS) code that created them.
It has been estimated that 403(b) plans cover about 20 percent of U.S. employees. But for some reason they get much less press than 401(k) plans, which are sponsored by private, for-profit companies. Like a 401(k) however, a 403(b) is a way for eligible employees to save for retirement through payroll deductions (also called elective deferrals) on either a percentage of salary or set dollar amount basis.
403(b) vs. 401(k) plans
Like a 401(k), 403(b) plans can be funded with pre-tax or after-tax dollars. Pre-tax contributions grow tax-deferred until you withdraw them at retirement, at which point they are taxed as ordinary income. After-tax contributions, also known as Roth contributions, means your money grows tax-free, and since you have already paid taxes on these contributions, you will not pay tax on withdrawals made in retirement.
Both plans include a 10 percent tax penalty for early withdrawals taken before reaching age 59 ½. Military reserve duty, permanent disability or medical expenses exceeding a certain percentage of your adjusted gross income may make you eligible for a qualified distribution that does not trigger the penalty.
Both 401(k) and 403(b) plans may allow for loans, hardship withdrawals and an additional catch-up contribution for employees over age 50. An additional commonality includes allowing an employer match (should an employer choose to offer one). Contributing to your 403(b) at least up to the amount of your employer’s match is a good way to avoid leaving (almost) free money on the table.
403(b) contribution limits
Employees can contribute up to $23,000 in 2024. Those over age 50 can also contribute up to an additional $7,500 in catch-up contributions. Regardless of age, employees with at least 15 years of service with the same employer and an average annual contribution of less than $5,000 per year may be permitted to defer an extra $3,000 per year over and above normal IRS deferral limits (up to a lifetime limit of $15,000 for this type of catch-up contribution). Not all employers offer catch-up contributions based on the 15-year rule.
For plans with employer contributions, you can contribute up to 100 percent of your salary, or $69,000, whichever is less. This limit rises to $76,500 for those age 50 or over. Contributions made over and above the IRS elective deferral limits are made on an after- tax basis.