What Is a 403(b) Plan?

A 403(b) plan is a special tax-deferred retirement savings plan that is often referred to as a tax-sheltered annuity, a tax-deferred annuity, or a 403(b) annuity. It is similar to a 401(k), but only the employees of public school systems and 501(c)(3) organizations are eligible to participate in 403(b) plans.

Employees can fund their accounts with pre-tax contributions, and employers can also make contributions to employee accounts. Employer contributions can be fixed or discretionary. Eligible employees may elect to defer up to 100% of their salaries, as long as the amount does not exceed $23,500 in 2025 (up from $23,000 in 2024). A special catch-up contribution provision enables those who are 50 and older to save an additional $7,500 in 2025 (unchanged from 2024). Total combined employer and employee contributions cannot exceed $70,000 in 2025 (up from $69,000 in 2024). Contribution limits are indexed annually for inflation.

New for 2025, workers age 60 to 63 can make a larger "super catch-up" contribution of $11,250. Like all catch-up contributions, the age limit is based on age at the end of the year, so you are eligible to make the full $11,250 contribution if you will turn 60 to 63 any time during 2025, but not if you will turn 64.

Employees have the option of choosing the types of investments utilized in their funds. A 403(b) can be an annuity contract, a custodial account, or a retirement income account. It is a good idea to do a little research before selecting how you would like to invest your funds. Your employer can provide you with a list of the investments that are available.

Distributions from 403(b) plans are taxed as ordinary income. Withdrawals made before age 59½ may be subject to a 10% federal tax penalty unless a qualifying event occurs, such as death or disability.

Generally, once you reach age 73 (75 if age 73 is reached after December 31, 2032), you must begin taking annual required minimum distributions. You can receive regular periodic distributions on a schedule that is calculated based on your life expectancy, or you can collect your entire investment as a lump sum.

Participating in a 403(b) plan may be a good way to save for retirement. Contact your employer to find out what type of plan is offered and how you can take advantage of this retirement funding vehicle.