A 403(b) plan is a type of retirement plan that’s available to employees of certain tax-exempt
organizations as defined by IRS 501(c)(3) code. The 403(b) is similar to a 401(k) plan which workers in
the private-sector can contribute to. But, the 403(b) is different from 401(k) in several ways, for example,
the types of accounts that can be invested in.
Who Can Contribute to a 403(b)?
You may be able to contribute to a 403(b) if you’re an employee of a public school (including K-12
schools, colleges, and universities), an employee of a tax-exempt/501(c)(3) organization, an employee
of a cooperative hospital service organization, or a minister of a 501(c)(3) organization or a self-
Your employer must set up the 403(b) plan and allow you to make contributions. You can’t set up the plan
on your own.
While 401(k) participants can invest their funds in individual stocks, 403(b) participants don’t have that
same option. Instead, 403(b) participants are limited to annuities and variable annuities that are set up
through insurance companies, custodial accounts that are invested mutual funds, or retirement income
accounts set up for church employees. Though you can’t invest your 403(b) directly in a stock, you may
be able to invest in stock fund, which is a mutual fund invested in stocks.
Contributing to a 403(b)
Contributions made to a 403(b) and earnings on your
contributions aren’t taxed until they’re withdrawn. You can
opt to have your employer exclude your contributions
from your income and send the contribution directly to the
financial institution administering your account through
elective deferrals. Your employer may have a program to
match all or some of your contributions. These
non-elective contributions are taxed when you withdraw
Some employers offer a Roth 403(b), which is similar to
a Roth IRA in that you make post-tax contributions to the
account. Then, when you withdraw the money at
retirement, you don’t pay additional tax on the withdrawal
since it has already been taxed.
The amount you can contribute to a 403(b) each year is limited. In 2011, 403b contribution limits state
that you can contribute a maximum of $16,500. That allowable contribution amount could be higher
based on your years of service with your employer, your salary, and contributions made in previous
years by your or your employer. For example, if you’ve been with your employer more than 15 years and
haven’t maxed out your contribution in previous years, you may be able to make an additional
contribution of $3,000. You can also make a catch-up contribution of up to $5,500 if you’ll turn 50 by the
end of the year and you’ve maxed out your contribution for this year. Contributing more than the
maximum amount puts you at risk of excess contribution penalty.
You can rollover your 403(b) plan into an IRA if you leave your job, retire, or become disabled. In the
event of your death, a beneficiary can also rollover your 403(b) plan into an IRA. Rolling your funds into
an IRA will give you more flexibility with investment options, e.g. you can invest IRA funds in stocks. An
IRA can’t be rolled over into a 403(b).
As with other types of tax-deferred retirement plans, early withdrawals from a 403(b) are subject to
income taxes, a 10% early withdrawal penalty if you’re under age 59 ½, and a 20% federal withholding if
you don’t transfer the amount to another qualified plan.
Once you reach age 70 ½, the IRS requires you to take required minimum distribution each year. You
may be able to defer the RMD until the year after you retire, if you’re still working when you turn 70 ½.
RMD amounts are based on your life expectancy or that of your designated beneficiary if you’re married.
You’ll be subject to a 50% excess accumulation tax if you don’t take your RMD each year.
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What is a 403(b) Plan?
If you’re a public service employee a 403b plan may
be an good option to save for retirement. Here’s a
look at what is a 403b plan.