Pros and Cons of 403(b) Plans

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Millions of public school employees, along with some employees at colleges and universities, hospitals, charities, and other nonprofit organizations, use 403(b) plans to save for retirement.

As is the case with employer-provided 401(k) plans, 403(b) plans are tax-advantaged. Contributions are typically deducted from your paycheck and invested, providing an important source of income in retirement. Pretax contributions will reduce your taxable income, and your investments will grow tax-deferred until you retire. If your plan offers a Roth option, contributions are after-tax, but withdrawals will be tax-free as long as you’re 59.5 or older and have owned the account for at least five years.

And as with 401(k)s, employers may offer a matching contribution to a 403(b) up to a certain threshold (a maximum 3% of your salary, for example). Most public schools don’t offer a match, but if your employer provides one, consider contributing at least enough to earn it.

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Most pensions for teachers who work 30 years or more replace 50% to 70% of their salary, so a 403(b) can fill the gap, says Dan Otter, cofounder of 403bwise, a nonprofit that advocates for better retirement plans for K–12 teachers. But 403(b)s have some key characteristics that make them unique — and sometimes less than desirable.

Perks and pitfalls of 403(b) plans

Certain benefits that 403(b)s offer aren’t available with other types of employer-provided plans. The regular contribution limit is the same as with 401(k) plans — $23,000 in 2024 for workers younger than 50. And employees age 50 or older can make $7,500 in catch-up contributions to a 403(b) this year, just as those who have a 401(k) can.

But some employers permit longtime employees to make additional catch-up contributions to a 403(b). If you’ve been with an employer for at least 15 years and you’ve made an annual average contribution of less than $5,000 per year, you can contribute an additional $3,000 per year, up to a lifetime maximum catch-up contribution of $15,000.

You can take advantage of the 15-year rule even if you’re younger than 50. For those who are 50 or older, the IRS will apply contributions above the regular limit first to the 15-year rule, then to the standard catch-up contribution limit. If your employer allows these extra catch-up contributions, “they can be a great way to boost your tax-smart retirement savings plan,” says Noah Damsky, a certified financial planner based in Los Angeles.

On the downside, 403(b) plans aren’t subject to the Employee Retirement Income Security Act (ERISA), which means employers don’t have the same fiduciary obligations as companies that offer 401(k) plans, Otter says. As a result, many teachers are offered anywhere from 20 to 100 different plans, often provided by insurance agents promoting high-cost variable annuities, says Nicholas Bunio, a CFP based in Philadelphia.

Though many 403(b) plans have lackluster offerings, the problem really lies with plans for employees in K–12 public schools, he says. In 2022, the Securities and Exchange Commission fined Equitable Financial $50 million for providing misleading statements and omitting information about fees for variable annuities it sold to investors, most of whom were teachers and other school staff.

You can find out which school districts are doing right by their employees with 403(b) plans by using the search tool at www.403bwise.org/education/vendor-search-tool. If your only option is a plan filled with high-cost products, consider investing in a Roth IRA instead.

Note: This item first appeared in Kiplinger's Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

Emma Patch joined Kiplinger in 2020. She previously interned for Kiplinger's Retirement Report and before that, for a boutique investment firm in New York City. She served as editor-at-large and features editor for Middlebury College's student newspaper, The Campus. She specializes in travel, student debt and a number of other personal finance topics. Born in London, Emma grew up in Connecticut and now lives in Washington, D.C.