What is a 403(b)?

1 min readLast updated November 10, 2023by Rachel Carey

A 403(b) is a retirement savings plan for people working in public sectors and other tax-exempt organizations.

An easy way to understand the 403(b) is to think of it as an equivalent plan to the 401(k), but while the 401(k) is for workers in private companies, the 403(b) is for those who work for public and some non-profit organizations.  

Contributions to a 403(b) come from your paycheck in the form of payroll deductions. You aren’t taxed on these contributions but will be taxed when you withdraw from the 403(b) in retirement.  

How does a 403(b) work? 

If you’re a public employee or work for a tax-exempt organization such as a charity or a church, you may be eligible for a 403(b) retirement savings plan. 

Professionals who might access and take part in a 403(b) can include: 

  • Government employees – people who work for a federal or state agency 

  • Public school, college and university employees 

  • Hospital employees 

  • Church employees 

  • Charity employees 

  • Employees of 501(c)(3) organizations (this is an IRS classification for charitable organizations) 

As 403(b) contributions are taken from your paycheck, you are not taxed on them. This reduces your taxable income, meaning you are saving for retirement and saving on the amount of tax you pay at the same time. 

How can I withdraw from a 403(b)? 

The conditions associated with 403(b) withdrawals mean you should think carefully about when to withdraw.  

You can start withdrawing from your 403(b) when you are aged 59.5.  

However, if you start to withdraw before this age and certain conditions have not been met, you will receive an early withdrawal penalty. This penalty will be 10 percent of the amount withdrawn.  

 Once you start withdrawing from a traditional 403(b), it will be taxed as regular income at the federal level.  

Different rules apply to a Roth 403(b).  

What are the different types of 403(b) plans? 

There are two main types of 403(b) plans: traditional and Roth. 

A traditional 403(b) means: 

  • Contributions are payroll deductions, which are taken from your paycheck before tax and lower your overall taxable income. 

  • Taxes will be due on that money when you withdraw it.  

A Roth 403(b) means: 

  • You pay contributions into your 403(b) after you’ve been taxed. 

  • This means you won’t have to pay any tax on the money when you eventually withdraw it. 

What’s the difference between traditional and Roth 403(b)s? 

The essential difference between these two 403(b) plans is how you pay tax on your contributions. Depending on your tax bracket, you may prefer one over the other. 

Generally, if you think your tax bracket is higher now than when you retire, a traditional 403(b) may suit you as you’ll keep more of your money.  

However, if you expect your tax bracket to increase when you retire, a Roth 403(b) may reduce your tax burden. 

There’s also a special type of 403(b) designed especially for employees of religious organizations. This is called the 403(b)(9). 

What are the 403(b) contribution limits? 

For 2023, the maximum contributions are $22,500. If you’re over 50, you can also opt to pay extra money each year through catch-up contributions. For the 2023 tax year, you can pay up to $7,500 in catch-up contributions. 

An employer may also match part of an employee’s contribution to the 403(b). However, there are limits on the amount an employee can contribute. The total combined contributions paid into a 403(b) must not exceed $66,000. 

If your employer offers both, you can even have a 403(b) and a 401(k). However, if you have both retirement plans, the annual limit on your contributions remains the same – $22,500 in total deposited across both schemes. You cannot double your allowance by having both plans.  

What 403(b) withdrawal rules do I need to know? 

As mentioned, there are two key principles with withdrawing from your 403(b): 

  1. You will have to pay an early withdrawal penalty if you take out funds before the age of 59.5 years. 

  1. You will pay tax on your withdrawals if you have a traditional 403(b). 

However, for rule number one, some exceptions are helpful to know: 

  • You can carry over your 403(b) balance if you change employers. 

  • If you die, your next of kin can access the funds. 

  • If you become disabled, you can withdraw from your 403(b). 

  • If you are in the armed forces reserves and are called up, you may be able to make a “qualified reservist distribution.” 

  • If you find yourself in financial hardship, you may be able to access some of your contributions but not those made by your employer. 

What’s the difference between a 403(b) and a 401(k)? 

The 403(b) and 401(k) are similar retirement savings plans but have some key differences. 

The biggest difference lies in who can access the retirement plans. 403(b) is designed for public sector workers, whereas 401(k) is aimed at those who work for private companies.  

403(b)s, and 401(k)s have the same annual contribution limit, and if you’re one of the few employees who can have both a 403(b) and a 401(k), your annual contribution limit across both plans must not exceed that limit. 

It’s common for 403(b) plans to vest funds more quickly than 401(k)s. In some cases, 403(b) plans allow immediate vesting of funds, which is incredibly rare for a 401(k). This can offer you greater ownership and control over your retirement funds. 

That’s almost everything you need to know about a 403(b), but remember, a financial advisor can help with your retirement planning and will be able to offer expert advice tailored to your situation. If you want to make the most of your options for retirement savings, Unbiased can help you find an expert today.

Senior Content Writer

Rachel Carey

Rachel is a Senior Content Writer at Unbiased. She has nearly a decade of experience writing and producing content across a range of different sectors.