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Understand 403b plans, their rules, and limitations. Learn how these retirement plans work and if they're right for you.

403(b) Plans: What They Are, Rules & Limitations

Disclaimer: This website and its content are for informational purposes only and is not financial advice.

What is a 403(b) Plan?

A 403(b) plan is fundamentally a retirement savings program that allows eligible employees to contribute a portion of their salary to individual accounts.

The money you contribute to a traditional 403(b) plan is typically made on a pre-tax basis, meaning it reduces your current taxable income. This allows your savings and any earnings they generate to grow tax-deferred until you begin making withdrawals in retirement.

At that point, the distributions will be taxed as ordinary income. Some employers may also offer a Roth 403(b) option, where contributions are made after-tax, but qualified withdrawals in retirement are entirely tax-free, including any earnings. The choice between a traditional 403(b) and a Roth 403(b) depends on your individual tax situation and future expectations.

403(b) Contribution Limits

Understanding the contribution limits for a 403(b) plan is crucial for maximizing your savings. The Internal Revenue Service (IRS) sets annual limits on how much you can contribute. For 2025, the standard employee elective deferral limit for a 403(b) is $23,500. This limit applies to your personal contributions from your salary.

However, there are also special catch-up contribution provisions that can allow you to save even more. If you are age 50 or older, you may be eligible to contribute an additional $7,500 annually to your 403(b).

Furthermore, some employees with 15 or more years of service with the same eligible employer might qualify for another special catch-up contribution, potentially adding up to $3,000 per year, with a lifetime maximum of $15,000.

It's worth noting that if both catch-up opportunities are available, the 15-year rule catch-up is applied first. These catch-up options provide valuable opportunities for those nearing retirement to boost their 403(b) savings.

Employer Contributions for Your 403(b)

Beyond employee contributions, some employers may also contribute to your 403(b) plan. These employer contributions can come in various forms, such as matching contributions (where the employer contributes a certain amount based on your own contributions) or discretionary contributions.

Employer contributions, combined with your own deferrals, are subject to an overall annual additions limit set by the IRS, which for 2024 is $69,000, or 100% of your includible compensation, whichever is less.

These employer contributions can significantly enhance the growth of your 403(b) over time, making it a very attractive benefit.

Updated May 29th, 2025

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403(b) Withdrawal Rules and RMDs

When it comes to accessing your funds from a 403(b) plan, there are important withdrawal rules to consider. The money in a 403(b) is intended for retirement, so distributions generally begin penalty-free once you reach age 59½.

If you withdraw money from your traditional 403(b) before this age, you will typically owe income taxes on the amount withdrawn, plus a 10% early withdrawal penalty. There are, however, certain exceptions to this penalty, such as for disability, qualified medical expenses, or separation from service at age 55 or older.

It is always wise to consult with a financial advisor before making any early withdrawals from your 403(b) to fully understand the implications.

Another important aspect of 403(b) plans is the concept of Required Minimum Distributions (RMDs). Once you reach a certain age, currently 73 (or 75 if you were born in 1960 or later), the IRS mandates that you begin taking annual withdrawals from your traditional 403(b) account.

These RMDs ensure that the deferred taxes on your retirement savings are eventually paid. The amount of your RMD is calculated based on your account balance and life expectancy. Failing to take your RMD can result in significant tax penalties, typically 25% of the amount not withdrawn.

403(b) vs 401(k): Key Differences

While a 403(b) plan offers many similarities to a 401(k), the key distinction lies in the type of employer that offers them. A 401(k) is typically available to employees of for-profit companies, whereas a 403(b) is designed for those working in public schools, certain non-profit organizations, and religious institutions.

This distinction means that if you are employed in one of these specific sectors, a 403(b) will likely be your primary employer-sponsored retirement plan. Both plans share the common goal of providing a tax-advantaged way to save for retirement, and both are subject to IRS regulations.

Key Takeaways

In conclusion, a 403(b) plan is an invaluable tool for retirement savings for eligible employees in the public and non-profit sectors. By understanding what a 403(b) is, how contributions work, the applicable limits, and the rules surrounding withdrawals, you can effectively utilize this plan to build a secure financial future.

It offers tax advantages, the potential for employer contributions, and a structured way to save, making it a powerful component of a comprehensive retirement strategy.

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By Jordan McCaleb, Investment Researcher