403(b)
A retirement plan for employees of public schools, universities, churches, and certain nonprofits. Similar to a 401(k) in structure and contribution limits, with investments typically in annuities or mutual funds.
What is a 403(b)?
A 403(b), also called a tax-sheltered annuity plan, is a retirement plan offered by public schools, colleges, religious organizations, and certain nonprofit employers. It functions much like a 401(k): employees defer part of their salary pre-tax, investments grow tax-deferred, and withdrawals in retirement are taxed as ordinary income.
Key features
- Same contribution limits as 401(k): employee deferral and catch-up limits match
- Pre-tax or Roth: most plans offer both options
- Employer match: varies by employer, less common than in corporate 401(k)s
- Investment menu: historically annuity contracts; modern plans often offer mutual funds. Plan quality varies widely by employer
- Extra catch-up: some employees with 15+ years of service get an additional catch-up on top of the age-50 catch-up
- Similar withdrawal rules: 10% penalty before age 59½, ordinary income tax on distributions
Things to watch for
403(b) plans historically have had higher fees than corporate 401(k)s because many still use annuity products. If your employer offers a low-cost mutual-fund option, take it. Review the expense ratios of available investments; small differences compound to large amounts over a career.