What Is The 403(b) And How Does It Work?

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403b Retirement Plan

Are you a physical therapist or occupational therapist who works for an employer that provides you with a 403(b) retirement plan?

This article will go over the important aspects of. . .

  • What a 403(b) is
  • Who is eligible for a 403(b)
  • How much can be contributed to a 403(b) 
  • When contributions can be made to a 403(b)  
  • If you can contribute to both a 403(b) and other retirement plans as well
  • And so much more. . .

Ready to learn if a 403(b) is right for you?

Let’s get started.

What Is A 403(b)?

403(b) is a type of retirement plan that acts as a vehicle to help certain employees save and invest for their eventual retirement while gaining tax benefits along the way.

Only certain employees are eligible to have a 403(b), though. More on this next.

Who Is Eligible For A 403(b)?

The IRS lists that, if you are an employee working for one of the following organizations, you may qualify to have a 403(b):

  • A 501(c)(3) tax-exempt organization
  • A public school, state college or university
  • A public school organized by an Indian tribal government
  • A church

Ministers can also qualify to have a 403(b).

Just because you work for a qualifying employer, though, doesn’t entitle you to get a 403(b). Your employer doesn’t have to offer you a 403(b) if you typically work less than 20 hours per week or if you already have access to a 401(k), 457(b), or another 403(b) retirement plan. 

Working less than 20 hours per week is defined as working less than 1,000 hours per year. You can check out the National Tax-Deferred Savings Association’s explanation on qualifying for a 403(b) while working less than a full time schedule if this pertains to you. 

Also, if you believe you work for a qualifying employer but you have not been given access to a 403(b), the IRS provides you with this information on 403(b)s to help you remedy this.

How Do I Open A 403(b)?

A qualifying employer must first establish the 403(b) plan. 

Then, when a qualifying employer hires you to be their employee, you will need to decide which vendor you would like to use for your 403(b).

A vendor is the investment firm with which your 403(b) account will be with (e.g. Vanguard).

Every employer has different vendor options. 

Some have a long list of options while other employers only offer a few. The former is more common, however, which can make choosing a vendor seem overwhelming because each vendor has their own investment options and fees – more on this below in “Do All 403(b)s Have The Same Investment Options And Fees?”

When you are hired, you should ask your employer which vendor options you have access to. They may provide you with a piece of paper with the names of the vendors listed on it or they may just direct you to 403bCompare.  

403bCompare is a website that was created by the California State Teachers’ Retirement System (CalSTRS) to provide free information to employees from any state (not just California) who have access to a 403(b). This information makes it much easier to compare each vendor’s investment offerings – I highly recommend you check it out before deciding which vendor to establish your 403(b) with.

Do All 403(b)s Have The Same Investment Options And Fees?

When 403(b)s were first created, they were called “tax-sheltered annuities” since employees could only invest in annuities. 

That’s long since changed, though, because now employees also have the option to invest in mutual funds. 

Here’s a deeper dive into these two investment options:

1. Mutual Funds

You can think of a mutual fund as a type of investment that is a conglomerate of other investments such as stocks and bonds.

There are two types of mutual funds: 

a.) Loaded Mutual Funds 

Loaded mutual funds will have extra fees you will have to pay as a commission whenever you buy or sell the mutual fund.

b.) No-Load Mutual Funds

No-load mutual funds do not have this extra fee.

Both loaded and no-load mutual funds still have some level of charges you must pay that goes towards what are called operating expenses, essentially the cost the vendor must cover in order to keep the mutual fund going.

2. Annuities

An annuity is a contract you have with an insurance company where you, as the investor, put forth an amount of money and in return you will be paid money called “income payments” in periodic installments sometime in the future over a period of time.

Think of an annuity as a pension that is being provided to you by an insurance company.

Annuities can be fixed, variable, or indexed. 

a.) Fixed Annuities

When you invest in a fixed annuity, your investment return is not determined by the stock market. Instead, the interest rate for your investment return is determined by the insurance company acting as your vendor.

The insurance company guarantees the rate of return on your investment, but your investment is not guaranteed by the Federal Deposit Insurance Corporation (FDIC). Therefore, if the insurance company goes out of business you could lose your entire investment.

b.) Variable Annuities

Variable annuities are more complicated than their fixed annuity counterpart.

Unlike a fixed annuity, there are more investment options with a variable annuity but mutual funds are the more common investment. Therefore, the return on your investment is tied to the stock market rather than a pre-determined guaranteed rate of return.

Variable annuities can also include insurance components, such as a death benefit payout to your beneficiary.

c.) Indexed Annuities

A stock market index is a collection of various investments to give investors an idea on how the stock market is performing. For example, the Dow Jones is a collection of 30 stocks.

Indexed annuities allow your investment returns to be tied to the performance of market indexes.

Like variable annuities, indexed annuities can also include insurance components.

Overall, the type and amount of fees vendors charge for the above investment options can range a great deal. Be sure you know what you will be expected to pay before choosing your vendor and type of investment.

For example, the average fees with variable annuities are 2.30% of the contract value. 

On the other hand, the average fee for a loaded mutual fund is just 0.71% while the average fee for a no-load mutual fund is only 0.27%.

How Do I Contribute To A 403(b)?

If you are an employee with a 403(b), you will contribute to your 403(b) account by signing a Salary Reduction Agreement which allows you to defer some of your salary each pay period. 

The phrase “Salary Reduction” may not seem appealing at first, as it implies you are making less money. However, it just means that you are asking your employer to deposit a certain amount of money from your paycheck into to your 403(b) rather than just sending your entire paycheck amount directly to you each payday. 

The amount of money you defer to your 403(b) is up to you.

What’s the Difference Between The Traditional 403(b) and the Roth 403(b)?

While the amount you contribute to your 403(b) is up to you, when you pay taxes on it is also up to you.

You will have to pay taxes, but when you have to pay these taxes is what you can decide.  

You have two different options to choose from:

1.) Traditional 403(b)

The traditional 403(b) allows you to avoid paying taxes on the money you will contribute to your 403(b). 

Instead, you will receive a tax deduction for the contributions you make to your 403(b), your contributions will be invested and grow on a tax-deferred basis in your 403(b), and then you will pay taxes when you start making withdrawals from your 403(b). 

The phrase used to describe traditional 403(b) contributions is “pre-tax contributions,” since your contributions are not being taxed.

2.) Roth 403(b)

The Roth 403(b) allows you to pay taxes on the money you will contribute to your 403(b). 

Your invested 403(b) contributions will then grow tax-free and when you start making withdrawals from your 403(b) you will not owe any tax on those withdrawals (see “How Do Taxes Work” below for more details).

The phrase used to describe Roth 403(b) contributions is “after-tax contributions,” since your contributions are being taxed.

Unfortunately, while the IRS does allow employers to offer employees the opportunity to make Roth 403(b) contributions, employers don’t have to provide employees with the Roth option. Talk to your employer’s Human Resources or Payroll Department to see if the Roth 403(b) option is available to you.

How Much Can Be Contributed To A 403(b)?

There are two types of contributions that can be made to a 403(b):

  1. The Employee Contribution
  2. The Employer Contribution

The IRS sets a limit on the amount of money that can be contributed to your 403(b). Each year, the IRS decides if this value may change – it often increases slightly to keep pace with inflation. 

1. Employee Contribution

For year 2023, an employee can contribute as much as $22,500 to their 403(b). However, if the employee’s salary is less than $22,500, then the employee’s salary is the maximum that can be contributed.

2. Employer Contribution

Although not required to do so, an employer can also contribute to an employee’s 403(b). 

Since the maximum total contribution the IRS allows for a 403(b) is $66,000 in 2023, an employer can hypothetically contribute as much as $43,500 to an employee’s 403(b) in 2023.

Sometimes an employer will offer “a match” – a term used to describe that the employer will contribute a certain amount to an employee’s 403(b) if the employee also contributes a certain amount. 

Ask your employer if you get an employer matching contribution – if you do but you don’t make a contribution to your 403(b) that is great enough to get the employer’s full matching contribution, then you are leaving money on the table.

Can More Be Contributed To A 403(b) If I Didn’t Contribute Very Much Early On?


There are two opportunities, called “Catch-up contributions” where you can contribute more to your 403(b). 

Both of these catch-up contributions are added to the employee contribution, so if you already contributed the maximum $22,500 to your 403(b) in year 2023 then you can still make one or both of these additional contributions as well if you qualify to do so. 

If you do qualify for both of these opportunities, you can make both of these additional contributions in the same year – you do not have to choose one catch-up contribution opportunity or the other.

1. The More Than 50 Years Old Catch-Up Contribution

If you are more than 50 years old, the IRS allows you to make a catch-up contribution of up to $7,500 for year 2023. 

Since the catch-up contribution is considered part of the employee contribution, in 2023 an employee over 50 years in age can contribute up to $30,000 to their 403(b).

2. The Working More Than 15 Years For Your Employer Catch-Up Contribution

This type of catch-up contribution is commonly referred to as the “15-Year Rule.”

That’s because, if you have worked for your employer for at least 15 years and your average yearly contribution was less $5,000, then the IRS will allow you to make additional contributions of $3,000 per year for a maximum total of $15,000 overall.

While the IRS does allow employers to offer employees the opportunity to make these additional contributions, employers do not have to provide employees with this opportunity.

Is There A Deadline For When A Contribution To A 403(b) Must Be Made?

Employees can make contributions to their 403(b) at any time during the current tax year.

For example, you can contribute during year 2023 up until December 31st and then pay taxes on April 15th of the following year.

If I Have A 403(b), Can I Also Contribute To A 401(k)?

Yes, if you have a 403(b) and a 401(k), you can contribute to both. 

However, the combined amount that you contribute to both is still limited to the employee amount of $22,500 in 2023.

For example, you can contribute $12,500 to your 401(k) and $10,000 to your 403(b) because this adds up to the maximum $22,500 for year 2023.

If I Have A 403(b), Can I Also Contribute To A 457(b)?

A 457(b) plan is another type of retirement account that can be available to employees who work at 501(c) and government organizations. 

Just like the 403(b), in year 2023, the IRS allows employees to contribute up to $22,500 and, if the employee is more than 50 years old, make an additional catch-up contribution of $7,500. 

If you have access to a 457(b) plan in addition to a 403(b), you can contribute each plan’s maximum allowable amount.

For example, if you have both a 403(b) and a 457(b), you can contribute the maximum $22,500 to each account for a total overall contribution of $45,000.

How Do Taxes With A 403(b) Work?

You can contribute to your 403(b) by making either traditional contributions or Roth contributions. Your choice will influence when you need to pay taxes.

See “What’s the Difference Between The Traditional 403(b) and the Roth 403(b)?” above to review taxes in relation to making contributions.

See “How Does Withdrawing Money From A 403(b) Work?” below to regards to paying taxes when making withdrawals.

Are There Any Rules For Withdrawing Money From A 403(b)?

Yes, the IRS has several rules you need to follow when making withdrawals from your 403(b).

1. Contribution Type

If you made traditional contributions to your 403(b), then your money will be taxed at your income tax rate when you withdraw it.

But if your 403(b) contributions were made as Roth contributions, then you won’t incur this tax since you already paid taxes on your contributions when you made them.

2. Age

You will need to be at least 59 ½ years old in order to start making withdrawals from your 403(b) without incurring a 10% penalty.

Withdrawals can be taken without penalty earlier if you leave your job and turn at least 55 years of age in that same year. This is called “The Rule of 55.”

You can also take withdrawals without penalty if you become disabled or if you need to pay for medical expenses that exceed 7.5% of your adjusted gross income.

If you don’t meet any of the above criteria, then any withdrawals you take from your 403(b) will be hit with a 10% penalty – that’s in addition to paying any taxes you already owe on your withdrawals if your 403(b) contributions were traditional contributions.  

Another age to be aware of is 72 – this is the age you will be required to start taking Required Minimum Distributions (RMDs).

If you don’t take the required minimum distribution, you’ll be hit with a 50% penalty.

How Do Rollovers Work With A 403(b)?

The IRS allows you to rollover your 403(b) balance to a 401(k), a 457(b), an IRA, a SEP IRA, a SIMPLE IRA, or another 403(b).

You are not required to pay any taxes or penalties for rolling over your 403(b) balance.

Can I Take Out A Loan On My 403(b)?

Yes, the IRS allows you to take out a loan on your 403(b) balance. The loan can be no greater than the lesser of 50% of your 403(b) balance or up to $50,000.

However, not all vendors allow you to take out a loan on your 403(b) balance. 

Check with your vendor.

What Happens To My 403(b) If I Change Jobs?

All of the money you contribute to your 403(b) is 100% yours. This is called “immediate vesting.”

However, the employer’s contributions may not be immediately 100% yours.

While some employers offer immediate vesting for employer contributions, some employers will require you to work for them for a certain number of years before the entire employer’s contributions become 100% yours. The more years you work for your employer, the greater percentage of the employer’s contributions become yours.

Ask your employer’s Human Resources or Payroll Department for their 403(b) vesting schedule so you will know how many years you must work for your employer in order for 100% of your employer’s contributions to be yours.

This will be especially important to know if you are thinking about changing jobs.

Final Thoughts. . .

The 403(b) can be a very good retirement plan for those that qualify to have one. There are some drawbacks, though.

Here’s a table to summarize:

403b Summary Chart

The high employee contribution limit is a big plus with the 403(b), as are the opportunities to get even larger employee contributions through catch-up contributions should you qualify. No all employers offer the 15-Year Rule as a catch-up contribution option, though, so be sure to find out if your employer does by asking the Human Resources or Payroll department. 

Another nice perk is that the money you contribute to your 403(b) is immediately yours. It’s unfortunate that the employer’s contributions are not, but that’s why you should ask your employer’s Human Resources or Payroll departments for a vesting schedule. This is especially important to have if you anticipate wanting to leave your job at some point. 

If you happen to also have access to a 457(b), you can really put a lot of money away for retirement because you are allowed to contribute the maximum to each account. Unfortunately, if instead of a 457(b) you have a 401(k), your employee contributions are limited to the aggregate contribution limit.

The ability to make either traditional or Roth contributions is an important 403(b) characteristic so that you can better diversity your retirement savings. But, again, not all employers offer the Roth option so find out from your employer’s Human Resources or Payroll department if you have the Roth option.

Your investment options are limited to either mutual funds or annuities – no individual stocks or any other types of investments. The fees associated with these types of investments can vary greatly by vendor. And while many employers will give you several vendors to choose from, the downside here is that you can’t work with a vendor outside of your employer’s list. So, if you are not happy with the vendors your employer offers, too bad – you’re stuck with choosing one of them.

But should you decide to leave your job, it helps to know that you can roll your 403(b) balance over into one of many different types of accounts without incurring a penalty.

Just be careful to follow the rules when eventually making withdrawals so that you avoid incurring a penalty.

Overall, the bottom line with a 403(b) is that you can put away a good amount of money towards your retirement and you have a fair amount of options in managing that money.

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