A 403(b) is a retirement savings plan offered to employees of certain public schools and tax-exempt organizations, allowing pre-tax contributions with tax-deferred growth.
A 403(b) plan is a tax-advantaged retirement savings plan specifically designed for employees of public schools, certain non-profit organizations, and some ministers. Similar to a 401(k), a 403(b) enables employees to contribute a portion of their salary to individual retirement accounts, typically on a pre-tax basis, which reduces their current taxable income. The investments within a 403(b) grow tax-deferred, meaning participants don’t pay taxes on earnings until the funds are withdrawn, usually in retirement. Some 403(b) plans also offer Roth contributions, which are made with after-tax dollars but allow for tax-free withdrawals under certain conditions. 403(b) plans are commonly funded through annuities or mutual funds. Employers may also offer matching contributions, although this is less common than in corporate 401(k) plans. There are annual contribution limits and potential penalties for early withdrawals, in line with IRS rules. These plans are particularly useful for educators, healthcare workers, religious leaders, and employees of tax-exempt organizations who want to build retirement savings in a tax-efficient manner.
403(b) plans offer unique retirement planning opportunities for clients affiliated with educational or non-profit organizations. For family offices managing wealth across generations or across various occupations, understanding the distinct characteristics and tax implications of 403(b) plans helps ensure accurate wealth reporting, compliance, and planning. In multi-generational wealth strategies, where some family members may have 403(b)s from prior employment, integrating these assets into consolidated reporting and distribution plans is critical. Tax implications of rollovers or distributions need to be carefully considered within the broader wealth preservation and retirement income planning strategies.
A high school teacher contributes $18,000 annually to her 403(b) plan. Her employer does not provide a matching contribution. Over 20 years, assuming a 6% average annual return, her account grows to approximately $700,000 tax-deferred. Upon retirement, she begins taking required minimum distributions (RMDs), which are taxed as ordinary income.
403(b) vs. 401(k)
While both are tax-deferred retirement savings plans, a 403(b) is reserved for employees of public education institutions and tax-exempt organizations, whereas a 401(k) is generally offered by private-sector employers. Regulatory oversight, investment options, and administrative rules may differ slightly, but both serve the same core purpose of retirement savings.
Who is eligible to participate in a 403(b) plan?
Employees of public schools, colleges and universities, non-profit 501(c)(3) organizations, and certain religious institutions are eligible to participate in 403(b) plans.
Can a 403(b) be rolled into an IRA?
Yes, 403(b) plan balances can usually be rolled over into a Traditional IRA or another qualified retirement plan such as a 401(k), maintaining the tax-advantaged status.
What is the contribution limit for a 403(b)?
For 2024, the elective deferral limit for a 403(b) is $23,000, plus an additional $7,500 catch-up contribution for participants aged 50 or older.
