This Is How Your 403(b) Plan Works

woman looking at 403(b) plan information with a calculator on hand

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Heather K Adams734
Content + Copy Writer
June 15, 2024 at 2:48PM UTC
Having a retirement account and investing in it regularly is an important part of planning for your future. We all want to have enough money to retire at a reasonable age and to be able to live well after we do so. Yet while most of us have probably at least heard of, if not started contributing to, a 401(k) retirement plan, there are a number of other retirement savings options that may be available to you. One of these is a 403(b) retirement plan. But just what is a 403(b) plan and how does it work?

What is a 403(b) plan?

A 403(b) retirement plan is quite similar to the more common 401(k) retirement plan: it's offered to you by your employer, it may involve investing in mutual funds or other such options and your contributions might even be matched by your employer up to a certain amount or percentage. What distinguishes a 403(b) plan from other retirement savings plans is mostly just how one becomes available to you.
Your 403(b) plan is available to you through your employer, yes, but only if your employer is a qualifying not-for-profit organization. Public schools, churches, 501(c)(3) organizations and some government employers are all able to offer their employees 403(b) retirement plan options.
"403(b)" refers to the tax code designation assigned to such plans by the IRS. Plans under this designation are also sometimes called tax-shelter annuities because your annuities, or regular contributions from your paychecks, are taxed only when you withdraw funds from the account. While these plans previously only allowed investment in your account via those annuities, most plans now offer additional investment options such as mutual funds. However, these options still aren't as diverse as they would be with a 401(k), and your 403(b) plan will still be grown mostly through your own annuities.

What are the benefits of having a 403(b) plan?

Obviously, having any kind of retirement account, even a simple savings account at your bank or credit union to which you add regularly, is a good idea. Nobody wants to work forever, right? So, if you work for a qualifying 403(b) employer, take advantage of this opportunity. Exercising the option to contribute to a 403(b) retirement plan means you're doing as much as you can today in order to live well tomorrow. Here are a few benefits specific to this kind of account:
  • It allows for pre-tax contributions, which means you only pay taxes when you take money out and never when you put money in.
  • After-tax contributions may also be allowed up to a certain amount per year, enabling you to make additional investments toward your retirement. These may be considered Roth contributions and, if so, will be accounted for separately.
  • Your money grows tax-free while it's in the account. Interest and growth of your annuities and investments in mutual funds aren't taxed.
  • Employer-matching contributions may also be available to you, although this is less likely than with a 401(k) retirement plan.

401(k) plan vs 403(b) plan.

Part of understanding what a 403(b) plan is and how it works involves recognizing just how it differs from other retirement plans, especially a 401(k), which it closely resembles. Both retirement accounts really are quite similar and can be thought of in much the same terms. However, there are a few key areas where they're definitely different.
401(k) plans are offered by for-profit companies, while 403(b) plans are offered by nonprofit organizations like public schools and churches. Your employer will likely not be able to choose which plan to offer you. Simply put, if they qualify as a not-for-profit employer, they're more than likely going to offer their employees a 403(b) plan.
Another key difference is where your money goes when you invest it into either retirement plan. 401(k) plans are generally held by a third-party investment company that manages the mutual funds and other investment options available to you. 403(b) plan contributions are generally held by an insurance company, although a mutual fund management company may also be involved. Remember, 403(b) plans lean more toward annuity contributions and are less likely to involve the diverse additional investment options of a 401(k) retirement plan.


How does a 403(b) plan work after you retire?

When you reach the age of 59.5, you're eligible to begin receiving money from your 403(b) account. You can wait until you're retired to do so, in order to keep building up your savings. You can determine how much money you'd like to receive at given intervals, or you may choose to take all of the money from this account and put it into a different one. Like with a 401(k) plan, however, you will still be responsible for all applicable taxes and fees associated with withdrawals.

How much should I put into my 403(b) plan?

As with other retirement plans, the answer to this is generally "as much as you can." If your employer offers matching contributions, try to meet their requirements in order to get what is essentially free money from them. In general, however, contributing 15% of your annual income is a good goal to aim for. Should you get a raise, remember to adjust the amount of your contributions accordingly. Remember, too, that the earlier you begin investing in your retirement savings account(s), the more money you'll have to live on when you actually reach retirement. If you're an older employee who doesn't have much saved for their retirement, ask your employer if catch-up contributions are available to you.

Do employers match 403(b) contributions?

Your employer may choose to match your 403(b) retirement plan contributions but isn't legally required to do so. And there are also additional considerations for qualifying 403(b) employers to look at before choosing to match your contributions. Doing so would mean losing their exemption to ERISA, or the Employee Retirement Income Security Act. And this would mean having to comply with more stringent regulations, such as participating in required nondiscrimination testing. Your 403(b) employer may not be willing to do this.

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