403(b)

A 403(b) Plan is a retirement savings plan similar to a 401(k), but it is designed for employees of public schools, certain non-profit organizations, and some religious institutions. Named after Section 403(b) of the International Revenue Code, it allows employees to contribute to a portion of their income to a tax-advantaged account.

403(b) plans can be funded through pre-tax salary deferrals (like a traditional 401(k)) or post-tax contributions (for Roth 403(b) plans). Employers may also contribute to the plan, and like a 401(k) the earnings grow tax-deferred until withdrawal. The main difference between a 403(b) and a 401(k) is the type of employer offering the plan.

Key Facts

• Eligibility:
  • Typically offered to employees of public schools, tax-exempt organizations (such as hospitals or charities), and certain religious organizations.
  • Certain plans may have waiting periods or require employees to work a minimum number of hours before becoming eligible.
• Contribution Limits (2024):
  • $23,000 per year for employees under 50.
  • $23,000 for employees 50 or older, including a catch-up contribution ($7,500).
  • Employers may also contribute, though the total combined limit for employee and employer contributions is higher than the individual employee limit (typically $69,000 for 2024)
• Tax Treatment:
  • Traditional 403(b): Employee contributions are pre-tax, reducing taxable income. Taxes are paid on withdrawals in retirement.
  • Roth 403(b): Contributions are made with after-tax dollars, but withdrawals are tax-free if conditions are met.
• Investment Options:
  • Common investment options include mutual funds, annuities, and in some cases, employer stock.
  • Employees can choose how to allocate their contributions across available options respectively.
• Vesting and Employer Contributions:
  • Employee contributions are immediately vested (belonging fully to the employee).
  • Employer contributions may be subject to a vesting schedule, which determines how long an employee must stay with the organization before those contributions are fully owned.
• Withdrawal Rules:
  • Early withdrawals before age 59½ are generally subject to a 10% penalty in addition to income taxes, though some exceptions apply (such as for permanent disability, medical expenses, or after separation from service at age 55 or older).
  • Required Minimum Distributions (RMDs) must begin at the age of 73.
• Loans and Hardship Withdrawals: Some 403(b) plans allow loans or hardship withdrawals, though these are subject to specific conditions and limits.

1. How is a 403(b) different from a 401(k)?

The primary difference is that a 403(b) is for employees of public schools, non-profits, and certain religious organizations, while a 401(k) is generally for private-sector employees. Investment options and employer contributions may also differ.

2. Can I have both a 403(b) and a 401(k)?

Yes, if you work for multiple employers offering these plans, you can contribute to both. However, the contribution limits apply per plan, not across both, so it is important to track contributions to avoid exceeding the limit.

3. Can I withdraw money from my 403(b) before retirement?

Early withdrawals are generally penalized with a 10% fee, but there are exceptions for things like permanent disability, medical expenses, or separation from service after 55 years.

4. What are tax benefits of a 403(b)?

Like a 401(k), contributions to a traditional 403(b) are tax-deferred, reducing your taxable income in the contribution year. Roth 403(b) contributions are after-tax but allow for tax-free withdrawals in retirement.

5. Can my employer match my contributions to a 403(b)?

Yes, many employers offer matching contributions, through the match structure and vesting rules vary by employer. Typically, employer contributions are subject to a vesting schedule, which means they may not fully belong to you until you have been with the organization for a set period.