Kathryn Pomroy
Should a 403(b) be part of your retirement strategy? Absolutely.
You may have come across a 403(b) as part of your benefits package as an employee at a public school or a charitable organization. If you think it looks like a 401(k), you’re half right.
A 403(b) can help you save for retirement just like a 401(k), but the two have distinct differences. We’ll help you uncover what a 403(b) is and the specifics around how it works. It's a great first step to working through your retirement checklist.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
What is a 403(b)?
A 403(b) is a retirement savings plan designed for employees of non-governmental organizations (NGOs), public schools, and some charitable or non-profit organizations. This usually includes the following institutions:
- Public universities
- State colleges
- Public schools
- Churches
- Hospitals
- Not-for-profit charities or organizations
The plan gets its namesake from the IRS code that implemented it. These retirement savings accounts let employees contribute towards retirement through pre-tax deductions from their paychecks. For Roth 403(b) participants, those contributions are after-tax.
How does a 403(b) work?
If you’re a librarian, teacher, administrator, or other eligible employee at a college, university, or public school system, you may have the opportunity to participate in a 403(b) plan. That also applies to employees at non-profit, tax-exempt charities such as churches designated as 501(c)(3) organizations.
When you decide to contribute to a 403(b), you typically choose between two options to make contributions:
- A percentage of your salary or paycheck
- A dollar amount
Unless you designate it as a Roth contribution, your payroll deduction is tax-deferred, meaning it’s not included in your annual taxable income. Instead, you pay taxes on it when you make withdrawals in retirement. Your employer may also match a percentage of your contributions, but they’re not required to.
After choosing how much you want to deduct from each paycheck, that money is compiled within your retirement account, plus any contributions from your employer.
Over time, you may benefit from compounding interest, as you invest the money in your 403(b) into securities like bonds and mutual funds. This helps grow your retirement fund and makes a great option for building your retirement savings if you’re in one of the qualifying jobs.
Although you’re encouraged to save as much as you can towards retirement, there are limits to how much you can contribute to your 403(b), and the limits change annually.
Contribution limits for 2025
Each year, the IRS updates how much individuals can set aside in their retirement accounts. When contributing to a 403(b) plan in 2025, you’re limited to $23,500 in tax-deferred savings, (up $500 from $23,000 in 2024).
Employees 50 years old and above have a slight advantage since they can make extra “catch-up” contributions to their accounts. Catch-up contributions are limited to $7,500 in 2025. Overall, that means a 50-year-old employee with a 403(b) could contribute up to $31,000 of tax-deferred funds to their account in 2025.
Under a 403(b), you don’t just have to be 50 and older to make catch-up contributions. With at least 15 years of service, you can add $3,000 to the standard contribution limit per year in catch-up contributions. With the 15-year rule, these types of catch-up contributions have a lifetime cap of $15,000.
In addition, beginning in 2025, individuals ages 60 to 63 will be eligible for increased super catch-up contributions in their retirement plans. This enhanced catch-up contribution limit for those aged 60-63 will be $11,250 in 2025, for a total contribution limit of $34,750.
403(b) vs 401(k)
A 403(b) retirement plan is like a sibling of the 401(k), so they have plenty of similarities with some notable differences. 401(k)s were built for employees of private companies, while 403(b)s were created for employees of public organizations and charities. Both are tax-advantaged retirement savings accounts funded by pre-tax payroll deductions. However, you can also make after-tax contributions to both.
One of the best features of both types of plans is the ability of employers to match their employee’s contributions. Suppose you contribute $5,000 to your 403(b), and your salary is $50,000. If your employer has a 5% match policy, they will contribute an additional $2,500 to your account. That's essentially "free money" and a boost to your overall portfolio performance.
The IRS treats 403(b) and 401(k) accounts with many of the same rules for managing retirement savings plans. This is best exemplified by the rules governing contribution limits which hold the same for both types of accounts.
One of the biggest differences between a 403(b) and 401(k) is how employees are vested (when you get to keep 100% of your employer’s contributions). The rules differ between employers, but some 403(b)s make employees immediately vested, so even if you leave the company, you can still take the full value of your retirement account with you.
Comparatively, 401(k)s may require you to wait multiple years before being fully vested. Another major difference is the added catch-up contributions we mentioned earlier under the 15-year rule, which allows you to add extra to your retirement fund under the 403(b). A 401(k) doesn’t have that benefit.
Pros and cons of a 403(b)
A 403(b) retirement plan can be a boost for employees of non-profit organizations and public schools. That's because it can help you save for retirement with tax advantages, such as tax-deferred growth on contributions. A 403(b) may also include options for employer contributions and can provide flexibility in investment choices. But keep in mind that it often comes with fewer investment options, high fees, and early withdrawal penalties.
Related Content
-
I'm want to give my 3 grandkids $5K each for Christmas.You're comfortably retired and want to give your grandkids a big Christmas check, but their parents are worried they might spend it all. We ask the pros for help.
-
If You're Not Doing Roth Conversions, You Need to Read ThisRoth conversions and other Roth strategies can be complex, but don't dismiss these tax planning tools outright. They could really work for you and your heirs.
-
Could Traditional Retirement Expectations Be Killing Us?A retirement psychologist makes the case: A fulfilling retirement begins with a blueprint for living, rather than simply the accumulation of a large nest egg.
