403(b) Plans: Guide to Contribution Limits and Withdrawal Rules

If you work for a non-profit organization or government agency, you’re working for a cause.

While that can be fulfilling, it could affect your retirement savings because these sectors tend to offer lower income.

That means:

It's even more important for these workers to start saving for retirement, and to take advantage of employer-offered retirement plans.

If your employer offers a 403(b) plan, here’s what you need to know about making contributions and planning for the future.

What is a 403(b) Plan? 

If you work for a tax-exempt organization, such as a public school, university, church, or charitable organization, you may be eligible for a 403(b) plan.

Also known as tax-sheltered annuities, 403(b) plans allow you to set aside a portion of your income into an employer-sponsored account for your retirement savings.

Much like a 401(k), some employers will even match some or all of your 403(b) contributions. 

You don’t have to pay taxes on the money you contribute to a 403(b), which can help reduce your taxable income.

You also don’t have to pay taxes on the earnings on your account until you start making withdrawals when you reach retirement age. 

Individual accounts in a 403(b) plan can be in the following formats: 

1. Annuity contract: An annuity contract is a contract provided through an insurance company. 
2. Custodial account: With a custodial account, your account is invested in mutual funds. 
3. Retirement income account: Retirement income accounts are set up for church employees. They can invest in annuities or mutual funds. 

Eligibility

You can’t set up a 403(b) plan on your own, like you can with an IRA.

Instead, your employer must set one up for you.

Generally, 403(b) plans are offered by non-profit organizations and some government agencies.

Any employee of the organization, such as school teachers or administrators, hospital employees, or ministers can contribute to a 403(b) plan.

Contribution Limits

Contributing to a 403(b) plan has tax advantages since income taxes are deferred.

Because of that perk, the IRS has set limits on how much you can contribute to a 403(b) plan each year. 

The following limits apply:

• 2023 403(b) employee contribution limit: $22,500 ($20,500 in 2022)
• 2020 403(b) catch-up contribution limit (for employees 50 or older): $7,500 ($6,500 in 2022)
• Maximum combined employee and employer contributions: $66,000 or 100% of your includible compensation, whichever is less

If you meet other requirements, you may be able to contribute even more.

If you’ve worked for your employer for at least 15 years, you may be able to contribute up to $3,000 each year — on top of the above limits — for up to five years.

Withdrawal Rules

Like a 401(k), 403(b) plans are meant solely as retirement savings accounts.

In general, you can’t access the money tucked away until you reach retirement age.

That said:

There are exceptions.

You can start making withdrawals from your account in the following circumstances:

• You reach age 59½
• You lose your job
• You pass away
• You become disabled
• You encounter a financial hardship, such as a medical emergency
• You have a qualified reservist distribution 

If you take out money before you reach that criteria, you could be subject to a 10 percent early withdrawal penalty. 

Once you begin taking withdrawals — whether before retirement or after — you’ll owe ordinary income taxes on the distributions. 

Required minimum distributions

Like traditional IRAs and 401(k) plans, 403(b) plans are subject to required minimum distributions (RMDs).

Once you reach age 70½, you must start taking out RMDs from the 403(b), even if you don’t have a need for the money. 

Pros and Cons

If you’re thinking of contributing to a 403(b) account, there are some benefits and drawbacks to keep in mind. 

Benefits

• Contributions reduce your taxable income: You don’t pay income taxes on allowable contributions, meaning you can reduce your taxable income while you’re saving for retirement. 
• Earnings and gains aren’t taxed until you make withdrawals: Earnings and gains can continue to grow tax-free in your 403(b) account until you start making withdrawals. At that time, your withdrawals are subject to regular income taxes. 
• You could qualify for employer contributions: Some organizations will match the contributions you make to your 403(b) account, helping you grow your money faster. 

Drawbacks

• Limited investment options: When compared to 401(k) plans or IRAs, 403(b) plans tend to have fewer investment options. Instead of having hundreds of stocks, ETFs, and mutual funds to choose from, you may only have a dozen or fewer options. 
• Annuity focused: Many 403(b) plans are heavily focused on annuities, rather than mutual funds. Offered by insurance companies, annuities tend to have higher fees than other options, such as mutual funds, so it’s a less attractive option. 
• Early withdrawal penalties: If you need to access your money before you turn 59½, you’ll have to pay a 10 percent early withdrawal penalty on top of ordinary income taxes. 

How 403(b) Plans Work With Other Retirement Plans

In some cases, you may be able to contribute to more than one retirement plan.

Before you do so, it’s important to understand how a 403(b) plan works with other retirement options, including:

• 401(k) plans
• SIMPLE IRAs
• SIMPLE 401(k) plans
• Salary Reduction Simplified Employee Pension Plans (SARSEP)

If you have a 403(b) and one of the above retirement plans, the maximum you can contribute is $22,500 per year combined. 

For example, let’s say you worked for a major for-profit company that offered a 401(k) plan, and you worked there from January to June of 2023 and contributed $10,000 to your retirement plan.

If you took a new job with a non-profit organization in July and started contributing to a 403(b) plan, you could only contribute up to $12,500 for the rest of 2023 so you’d stay within the $22,500 limit.

Traditional IRAs and Roth IRAs 

Traditional IRAs and Roth IRAs have different contribution limits than 403(b) plans.

As such, you can contribute up to $22,500 to a 403(b) plan, and open up an IRA and contribute up to the maximum as well.

Contributing to both a 403(b) plan and an IRA is a great way to boost your retirement savings.

Other Retirement Options

If you work for a non-profit organization, school, university, or church, you may have access to different retirement options through your employer: 

457b

State and local government agencies often offer 457b plans.

Like 403(b) plans, 457b plans are tax-deferred, and your earnings aren’t taxed until you start making withdrawals.

As of 2023, you can contribute up to $22,500 per year in a 457b plan.

Pension plan

Some government employers offer pension plans.

Each year, your employer contributes to the plan.

Once you retire, they will pay you a set amount each month.

SIMPLE IRA

Offered by smaller non-profit organizations and employers, SIMPLE IRAs allow your employer to set up a retirement plan with low fees.

You are not required to contribute to it, but your employer must make either matching or nonelective contributions.

If the contributions are not matching, the employer must contribute 2% of the eligible employee’s compensation.

Bottom Line

If you work for a non-profit organization, it’s important to pay attention to your retirement savings options.

If your employer offers a 403(b) plan, it’s a good idea to take advantage of it, especially if your employer will match your contributions.

By regularly contributing to your 403(b) plan — and by opening up an IRA,  if possible — you can build a solid nest egg for your future.