403(b)
A 403(b) is a tax-advantaged retirement savings plan available to employees of public schools, non-profit organizations, and certain other tax-exempt entities, functioning similarly to a 401(k) but with a few unique provisions.
The 403(b) plan, authorized under Section 403(b) of the Internal Revenue Code, serves employees who work for public educational institutions (K-12 schools, colleges, universities), hospitals, churches, and other organizations qualifying under Section 501(c)(3) of the tax code. Historically, 403(b) plans were limited to annuity contracts issued by insurance companies — hence the old name 'tax-sheltered annuity' (TSA) — but modern 403(b) plans commonly offer mutual fund custodial accounts as well.
For 2025, the employee elective deferral limit mirrors the 401(k) at $23,500, with a $7,500 catch-up for those aged 50 and older. SECURE Act 2.0's enhanced catch-up for ages 60-63 ($11,250) applies here too. The combined employer-plus-employee limit is $70,000 ($77,500 with catch-up). A distinctive feature unique to 403(b) plans is the '15-year rule': employees with at least 15 years of service with the same employer may contribute an additional $3,000 per year (up to a lifetime maximum of $15,000) above the standard limit, subject to certain calculations.
Contributions can be made on a pre-tax basis (reducing current taxable income, with tax deferred until withdrawal) or, if the plan allows, on a Roth basis (after-tax, with tax-free qualified withdrawals). Investment options in 403(b) plans have historically been criticized for being limited or high-cost, especially in K-12 school district plans where insurance annuities with embedded surrender charges were common. Recent regulatory changes have encouraged more low-cost mutual fund options.
Withdrawal rules parallel the 401(k): distributions before age 59½ generally incur a 10% penalty plus ordinary income tax, though exceptions exist. RMD rules apply starting at age 73. Many 403(b) participants are also eligible for defined benefit pension plans, making careful coordination between the two plan types an important retirement planning consideration. The SECURE Act 2.0 extended many 401(k) plan provisions — including Roth employer matching and automatic enrollment requirements for new plans — to 403(b) plans as well.