What's A 403(b) Retirement Savings Plan? (And How To Take Advantage Of One)

If you've spent any time in the workforce you've undoubtedly heard of a 401(k), the standard employer-sponsored retirement plan that most companies offer, but if you haven't heard of a 403(b) plan, you're not alone. While it isn't as widely known, or used, as a traditional 401(k), this type of retirement plan is actually pretty close to the same thing, but it isn't available to everyone.

A 403(b) plan is an employer-sponsored retirement plan offered by certain types of employers, typically public schools and 501(c)(3) tax-exempt charitable organizations like churches and many health care facilities. These plans are also referred to by the IRS as tax-sheltered annuities, or TSAs. Like people invested in their more common counterparts, 401(k) plans, 403(b) participants are able to make regular contributions from each paycheck prior to taxes being withdrawn, and those funds are invested into a selection of options like stocks and bonds. The goal is for that investment to grow over time, so a significant nest egg is waiting for you when you finally reach retirement age.

Whether you participate in a 403(b) plan or a 401(k) plan, (take a moment to congratulate yourself on taking this smart step toward securing your retirement!), you're able to make regular, pretax contributions from your paycheck. Both types of tax-advantaged plans allow you to start making these contributions once you're eligible — most plans require you to complete a certain probationary period before you can join. Additionally, your employer can choose to offer a match for your contributions with either plan, although that match amount can vary from employer to employer and can depend on your position within the company and length of employment.

In this way, the 403(b) works exactly like a 401(k), with the main difference being the type of employer (profit or not-for-profit). Both plans allow you to have an active role in planning and saving for your future, however 403(b)s tend to have fewer options for how you can allocate your investment. One last difference between the two involves self-employed individuals. While it's possible to set up a solo 401(k) plan for a single person — something that's ideal for freelance business owners — this option is not available with the 403(b).

According to the U.S. Government Accountability Office, more than $1.1 trillion was invested in 403(b) plans in 2020, evidence that these plans are quite popular investment options for those who have access to them. Your employer should notify you when you're eligible to start participating and whether or not they'll match any portion of your contributions (and how much that match will be). Just like a 401(k), this employer match is a crucial part of your retirement savings. Note, there is a limit to the amount you can contribute each year to your plan, with 2024 limits sitting at $23,000, and at $23,500 for 2025. If you're over 50 years old (or turning 50 within the year) and worried you aren't saving enough for retirement, you can contribute an additional $7,500 (for 2024) in catch-up contributions.

Lastly, like a 401(k) plan, one of the benefits a 403(b) plan offers is the ability to borrow against it or take out your money early. While these options can be extremely costly to the participant thanks to taxes and early withdrawal fees, they do put much of the control of the account funds directly into the hands of the employee. Though pension plans may be an endangered species at this point in time, these employer-sponsored retirement plans help to ensure American workers still get a fair shot at the retirement they deserve.