Everything You Need to Know about a 403(b)

Calling all teachers, doctors, nurses, librarians, priests, nuns and non-profit employees—are you completely familiar with the retirement plans that may be available to you? If not, you’re potentially missing out on huge savings that will substantially ease your effort to save for retirement. This post includes everything you need to know about a 403(b) plan, as well as a brief intro to other plans that may be available to you, including 457 and 401(a) plans.

403(b) Basics

A 403(b) is an employer-sponsored retirement plan generally offered to employees of tax-exempt or non-profit organizations, including public schools, colleges, hospitals, libraries, philanthropic organizations and churches. These organizations are exempt from certain administrative processes required for 401(k) plans, allowing these employers, even those with small budgets, to help their employees save for retirement. As discussed in the previous post on employer sponsored retirement plans, estimates indicate only about 80% of all U.S. employees have access to any company-sponsored retirement plan, and 403(b)s only represent a small portion of the accounts available for that lucky bunch. However, if you are one of the lucky ones to have access to a 403(b), make sure you take advantage of it!

A 403(b) is almost identical to a 401(k): the primary differences are the types of employers sponsoring the plans, the investment choices (403(b) plans generally offer fewer investment choices), the vesting schedules (403(b) plans usually have a shorter or even immediate vesting period) and catch-up contribution opportunities (403(b) plans have an extra catch-up contribution opportunity for those with at least 15 years of service).

So what makes a 403(b) so special? Two things – (1) tax savings and (2) potential employer match.

To start, a 403(b) offers tax incentives for your retirement savings. That is, you can defer paying federal and state income taxes on your retirement account savings and their investment earnings until you withdraw the money at retirement (traditional) OR you can pay federal and state income taxes up front and allow your savings and their earnings to grow tax-free, without paying taxes when you withdraw the funds at retirement (Roth). Do not underestimate the power of taxes—even 15% on such a large retirement balance is hefty, so remember that a 403(b) offers you CONSIDERABLE tax savings. We’ll discuss traditional vs Roth in more detail below.

Next, like fluffy puppies and endless buffets, an employer match is just plain wonderful. While all 403(b) plans provide tax savings, 403(b) match percentages vary by employer. In fact, by law, employers are not required to match any part of an employee’s investment in a 403(b) plan. However, most 403(b) plans provide employer contributions, and these contributions are usually denoted as 50% of employee contributions on the first X% of salary the employee contributes. Regardless of the match percentage, if you’re lucky enough to have an employer offering a 403(b) with any match, make sure you take advantage of it.

When you invest in a 403(b), you control how you invest the money. The value of your account is based on the contributions made (by you and your employer) and the investments’ performance over time. Contrary to 401(k)s which provide a comprehensive list of investment options, 403(b) plans typically offer two types of investment products: mutual funds and annuity products (Note certain churches also offer retirement income account investments). We will detail which investment options are best for you later in this post.

Although a 403(b) is a fantastic savings vehicle, it has restrictions. To prevent you from tapping your retirement account savings before retirement, the IRS imposes costly penalties for withdrawing your funds prior to retirement (with the exception of certain circumstances, which we will discuss below). In addition, each year, the IRS sets contribution limits for your retirement accounts. The IRS contribution limits for a 403(b) in 2021 are as follows:

*Your total contribution, including your contribution and your employer’s contribution/match, cannot exceed $58,000 or 100% of your salary ($64,500 or 100% of your salary if age 50 or older)

As shown in the chart above, employees can contribute up to $19,500 to a 403(b) account out of salary in 2021. Employees age 50 and over can make extra contributions of up to $6,500, bringing the total annual limit to $26,000 for those age 50 and older. Note that the $19,500 and $26,000 limits do NOT include the employer match contributions, but your total contribution (including your employee contribution and your employer’s match) cannot exceed $58,000 or 100% of your salary in 2021 ($64,500 or 100% of your salary if age 50 or older). However, many 403(b) plans provide one additional wrinkle: those with at least 15 years of service and who have contributed on average less than $5,000 per year to their 403(b) could potentially have an extra catch-up contribution! More on this below.

Before we get to the investment options that are best for you and how much you should contribute, let’s first take a look at understanding which account you should select—traditional or Roth.

Traditional vs Roth

If your company offers a 403(b), chances are it offers a traditional account; however, certain companies also offer a Roth account, which is less common. The difference between “traditional” and “Roth” plans is purely a difference in timing of when you pay state and federal income taxes (in addition to certain limitations on withdrawals). When you designate which percentage of your paycheck you want to contribute to your retirement account, your employer will deduct that amount from your paycheck to deposit into your retirement account. Whether or not those funds are taxed prior to deposit into your account or afterwards, when you eventually withdraw the funds from your retirement account, depends on whether your account is traditional or Roth.

Let’s take a look at the specific characteristics of traditional and Roth 403(b)s:

Traditional 403(b):

  • Taxes Deferred: For a traditional 403(b), your employer deposits your contribution directly to your retirement account tax-free. In other words, your employer withholds no taxes on this income to pay taxes on your behalf, and eventually when you file your taxes, this contribution amount will be deducted from your total taxable income.
  • Taxes upon Withdrawal: Once deposited into your retirement account, your investments and their earnings (reinvested) grow tax-free until withdrawal. While you haven’t yet paid taxes on these amounts, having pre-tax investments early allows the larger amounts to compound over a long period of time. Upon withdrawal of funds from your account, you pay income taxes on both your contributions and earnings.
  • No Access before 59 ½: For all contributions and earnings in a Traditional account, you cannot access the funds before age 59 ½ without paying taxes and a penalty (except for certain circumstances discussed below). If you withdraw funds from your account prior to this date, you will pay the applicable income taxes on the full amount withdrawn as well as a 10% penalty.
  • Mandatory Withdrawals at 72: Upon reaching age 72 (age 70 ½ if born prior to July 1, 1949), the IRS requires you to withdraw at least a minimum amount each year from your account and pay ordinary income taxes on the withdrawal (the government wants some money!). If you don’t take withdrawals, or you take less than required, you’ll owe a 50% penalty tax on the difference between the amount you withdrew and the amount you should have withdrawn (yikes: go remind Grandpa!).

Roth 403(b):

  • After-Tax Contributions: For a Roth retirement account, your employer withholds ordinary income taxes on your contribution before depositing the after-tax amount into your account. Therefore, when you file your taxes for the year, the amount contributed to your retirement account will remain in your total taxable income.
  • Tax-Free upon Withdrawal: Once deposited into your retirement account, your investments and their earnings (reinvested) grow tax-free. You then pay no, zilch, nada taxes on the contributions and their earnings upon withdrawal (what a deal!).
  • Flexible Access before 59 ½: In order for a withdrawal from a Roth retirement account to be qualified (i.e., tax and penalty-free), you must (1) have been contributing to the account for the previous 5 years and (2) be at least 59 ½ years old. However, if you must make an unqualified withdrawal from your Roth 403(b) (not recommended!), such as when you make a withdrawal before the 5-year period and/or you have not yet reached the age of 59 ½, you only have to pay taxes and a penalty on the portion of the withdrawal that represents earnings (except for certain circumstances discussed below). But this does not mean you can make an early withdrawal and designate the total amount as contributions as opposed to earnings. The IRS treats each withdrawal on a pro-rata basis, allocating taxes and penalties to each withdrawal based on the total percentage of earnings in the 403(b) account.

To illustrate, say you have $100,000 in your Roth 403(b), of which $90,000 is from contributions and $10,000 is from earnings on those contributions. Any withdrawals will be considered to come 90% from contributions and 10% from earnings, meaning 90% would be nontaxable and the other 10% would be taxable and possibly subject to a 10% penalty. To illustrate further, assume you’re 45 years old, you’ve been contributing to your 403(b) for at least 5 years, and you make a withdrawal of $20,000 from your Roth 403(b). Of the distribution, $18,000 (20,000 x 90%) would be nontaxable and $2,000 would be taxable and potentially subject to a 10% penalty. If your tax rate is 24%, you would pay approximately $680 in taxes and fees to make this early withdrawal. However, these taxes and fees would be significantly lower than those required for early withdrawal on a traditional 403(b).

Note if you have a diversified (traditional and Roth) retirement account, you usually can choose the account from which you withdraw funds. This allows you to minimize your penalties/taxes depending on when you plan to make the withdrawals.

  • Mandatory Withdrawals at 72: Similar to the traditional account, upon reaching age 72 (age 70 ½ if born prior to July 1, 1949), the IRS requires you to withdraw at least a minimum amount each year from your account. If you don’t take withdrawals, or you take less than required, you’ll owe a 50% penalty tax on the difference between the amount you withdrew and the amount you should have withdrawn (yikes: now go remind Grandma!)

The following provides a summary of the primary traditional vs Roth 403(b) differences:

*Mandatory withdrawal age is 70 ½ if born prior to July 1, 1949 (changed by SECURE act beginning January 1, 2020).

403(b) Exclusions to Early Withdrawal Penalties

The easiest way to avoid early withdrawal payments is to not tap your retirement account before age 59 ½. Yet s**t happens, and sometimes you don’t have any other choice than to withdraw the funds early. But good news! The IRS comes to the rescue when you’re going through hardship. The IRS will not charge you the 10% penalty on non-qualified withdrawals (i.e., those Traditional plan withdrawals before age 59 ½ and Roth plan withdrawals before age 59 ½ or before you’ve been contributing to the account for the previous 5 years) from your 403(b) under the following circumstances:

  • Medical expenses (To pay for unreimbursed medical expenses in excess of 10% of Adjusted Gross Income (>7.5% if age 65 or older). We will cover AGI in our post on taxes)
  • Rollovers to an IRA or other qualified plan (To transfer balance in 403(b) account to another qualified plan)
  • Separation from company (When you retire, quit or get fired from your job during or after the year you reach age 55 [age 50 for public safety employees of certain plans]; if you do this, do not roll over your plan to an IRA or other qualified plan because this rule only applies to your current plan)
  • Substantially equal periodic payments (You receive substantially equal periodic payments over your life expectancy; must be separated from employer)
  • Birth/adoption expenses (Up to $5,000 per parent for birth/adoption expenses if you had a baby or adopted a child in the past year)
  • Military (You are a qualified military reservist called to active duty)
  • IRS Levy (IRS takes money directly from your account to pay taxes owed)
  • Court-ordered domestic payments (E.g., to pay spousal payments)
  • Disability (Total and permanent disability of the participant or owner)
  • Death (Of the participant or owner)

It’s important to distinguish between 403(b)s and IRAs for early withdrawals: the IRS provides exceptions to the early withdrawal penalties for Education (qualified higher education expenses), First-Time Homebuyers (only up to $10,000) and Medical Insurance Premiums (only if unemployed) for IRA’s only; therefore, you will be penalized for unqualified withdrawals from your 403(b) for these expenses.

Which One to Choose – Traditional or Roth?

There’s an ongoing debate and many example calculations about which is better: traditional or Roth. Most people will tell you a Roth retirement account is the better option, if available. But this is not necessarily true. Your choice should really depend on your circumstances and, specifically, how much higher (or lower) you think your tax rate will be during retirement.

Those in favor of the Roth account claim the small tax bill upfrontin exchange for what would otherwise be an undoubtedly larger tax bill laterprovides more tax savings and prevents you the burden of, and uncertainty in, paying taxes at retirement. On the other hand, those in favor of the traditional account claim these plans allow you to invest more now (assuming you haven’t reached the annual limit) from pre-tax dollars which will experience compound growth and in many cases create a higher after-tax return than a Roth account. Decisively determining which plan is best for you requires a detailed calculation with many assumptions regarding your income and tax rate at retirement. I don’t know about you, but (a) I don’t have a clue what my retirement income will be and (b) I don’t really feel like paying a financial adviser to guess my future situation either.

The diagram below simplifies the traditional vs Roth 403(b) decision for you (note there is a different decision tree for traditional vs Roth IRA). This decision matrix is not perfect, but it will give you a good reference point on which you can base your decision.

As shown above, if you don’t confidently know whether your income tax rate will be higher or lower in retirement than it is today, it would be wise to hedge your bets and split your contributions between a traditional and Roth 403(b). Keep in mind, however, you’ll still be capped at $19,500 (or $26,000 if you’re age 50+) for your total annual contributions (e.g., $9,750 to traditional and $9,750 to Roth).

Employer Match

Other than tax savings, the other huge benefit of a 403(b) is the potential employer match. This is free money, people! Many employers offer to match your 403(b) contributions up to a percentage of your salary as a way of encouraging you to contribute to your plan. In particular, an employer match is part of a company’s benefits package to you, so it’s worth considering the percentage at which prospective employers match retirement account contributions.

For 403(b) plans, fortunately most employers do match a percentage of your 403(b) contributions. If your employer offers a match, your first priority (after establishing your immediate obligation and emergency funds) should be to contribute to your 403(b) the maximum percentage of your salary at which your employer will match.

One of the biggest mistakes you can make, especially for those of you just starting your careers, is not contributing the maximum percentage of your salary at which your employer will match. What does this mean? Frequent employer match terms are as follows: the employer matches 50% of employee contributions on the first 6% of salary the employee contributes. In this situation, you would want your contribution percentage to be at least 6%.

To illustrate, assume Johnny works for a company offering the matching terms stated above (match of 50% on first 6% of salary the employee contributes). His salary is $50,000, and he has elected to contribute 10% of his salary to a traditional 403(b) plan. Each year, Johnny would contribute $5,000 (10% of his salary) to his 403(b) plan. In addition, each year, Johnny’s company would contribute $1,500 (50% x 6% x $50,000) to his 403(b) plan. The total yearly contribution made to Johnny’s 403(b) would be $6,500. Note even though Johnny contributed 10% of his salary, the company only matches 50% up to 6% of his salary.

Assume the same circumstances for Johnny except now he decides to contribute only 4% of his salary to his 403(b) plan. Johnny would contribute $2,000 (4% of his salary), and his company would contribute $1,000 (50% x 4% x $50,000). Johnny missed out on $500 in free money by not contributing another 2% of his salary! Boooo Johnny! To sum up, the minimum Johnny should contribute to his 403(b) plan is 6% of his salary.

Some companies will match dollar-for-dollar on all contributions by an employee, though this is rare. Other companies unfortunately do not match at all. It’s important for you to know (or ask) up to what percentage of your salary your employer will match as this is the minimum contribution you should make to your 403(b) each year.

Lastly, strongly consider whether you have “vested” in your employer’s retirement plan match before leaving a company. “Vesting” refers to the delay in an employee’s ownership of company benefits for a specified number of years to incentivize the employee to remain at the company. You immediately vest in your own contributions, but usually companies require a vesting period for employer contributions (i.e., the employer match). You should be able to determine the vesting period, if applicable, by reading your plan’s terms or contacting your company’s HR department.

How Much to Contribute

Clearly it’s important to contribute at least the percentage of your employer’s match, but exactly what percentage of your salary should you contribute? For 403(b) plans, this answer isn’t quite as simple.

After checking off your first four priorities (immediate obligation fund, emergency fund, maximizing employer match and paying off high-interest debt), your focus should be on funding your retirement accounts, including your 403(b). However, after contributing the percentage to maximize your 403(b) employer match, you should consider all of your retirement account options.

Once you’ve establishing your 403(b) contribution percentage to receive the maximum employer match, take a step back and assess whether your 403(b), IRA or options other than a 403(b) (refer to Options outside 403(b) section, below) would offer the better investments for your retirement portfolio. Oftentimes your IRA will be the better choice here as you will have more options to select an investment in line with your desired portfolio and at a lower cost (i.e., expense ratio). If this is the case, (i) invest enough in your 403(b) to get the maximum match, then (ii) invest in an IRA up to the established IRA limit, and then (iii) invest any remainder up to the 403(b) IRS limit (or other options outside of the 403(b), as discussed below).

If your employer does not offer a match, which unfortunately is often the case for employees of K-12 public schools, prioritize investing in an IRA up to the established IRS limit (assuming an IRA offers better investment options at a lower cost). Then invest any remainder in your 403(b) up to the IRS limit (or other options outside of the 403(b), as discussed below). Refer to our post on IRAs for further information on IRAs.

With the above guidance in mind, most experts recommend 10% of your salary as a good starting point, but even many frugal, savvy, young professionals contribute 25% to even 30% of their salaries. These percentages should not be your reference point, however; first get through your first four priorities and determine how much money remains. As all contributions must originate as deductions from your paychecks, you won’t be able to deposit this amount directly into your retirement account. Rather, you’ll need to set a contribution percentage (this requires some math and guessing on your part) for your employer to deposit the designated percentage of your paycheck directly into your 403(b) account. Note this contribution and the percentage you choose will be recurring for every paycheck (until changed), but you can change the contribution percentage as often as you would like.

Determining the right contribution percentage can involve some trial and error. Thus, you should adjust your contribution percentage as often as necessary to get a sense of the appropriate percentage for you, especially if you start with a percentage much higher than you will be able to sustain. Remember, however, to not be overly conservative on your contribution percentage: if you have extra cash sitting in your checking or savings accounts (unrelated to your immediate obligation and emergency funds), that money could be sitting in your retirement account reaping the wonderful tax and match benefits (assuming you haven’t already surpassed the contribution limit).

403(b) Contribution Limits

As mentioned above, employees can contribute up to $19,500 to a 403(b) account out of salary in 2021. Employees age 50 and over can also make catch-up contributions of $6,500 in 2021, bringing the total annual limit to $26,000 for those age 50 and older.

However, many 403(b) plans provide an extra catch-up contribution for those with at least 15 years of service and who have contributed on average less than $5,000 per year to their 403(b). Specifically, if permitted by your 403(b) plan and you have at least 15 years of service with the same public school system, hospital, home health service agency, health and welfare service agency, church, or convention or association of churches (or associated organization), your annual 403(b) contribution limit increases by the lesser of:

  1. $3,000
  2. $15,000 less the sum of prior years’ 15-year catch-up contributions
  3. $5,000 x years of service with the employer, minus total 403(b) employee contributions (excluding age 50+ catch-up contributions)

Based on this criteria, the 15-year catch-up is only applicable to those who have contributed on average less than $5,000 per year (excluding age 50+ catch-up contributions) to their 403(b). In addition, if eligible for the 15-year catch-up, your maximum 15-year catch-up contribution is $3,000 per year and $15,000 over your life. Employees qualifying for this 15-year rule can therefore have an annual contribution limit as high as $22,500 in 2021. As the lifetime limit for the 15-year catch-up is $15,000, you need to track your contribution history to determine when you have used all of your lifetime limit.

For example, assume Bobby, age 50, has worked as a teacher for 15 years, has a 403(b) plan eligible for the 15-year catch-up, has annual compensation of $60,000 and has contributed a total of $50,000 to his 403(b) account. Bobby can contribute a total of $29,000 ($19,500 403(b) annual limit + $3,000 15-year catch-up + $6,500 age 50+ catch-up) to his 403(b) in 2021.

Whatever the amount is, once again, at the very least you should invest enough to receive the full match offered by your company. This is the freest (yes, that’s a word) money you will ever receive, so do not forget this very important advice.

Which Investment(s) Should I Choose?

Whereas employers usually hire one administrator (also known as an account custodian) to manage 401(k) plans, employers often allow multiple administrators to oversee 403(b) plans. 403(b) administrators usually include various insurance companies and investment companies, each offering a different menu of investment options. Some 403(b) employers are notorious for not providing detailed information on your 403(b) plan administrators and their respective investment options. If this is your case, the first step is contacting your organization’s benefits contact or department to obtain a copy of the summary plan description (which companies are now required to maintain). Based on this plan description, you should be able to identify a list of administrators and their respective investment options. To analyze your available investments, you’ll need to evaluate information on each investment’s strategy, performance and expense ratio. Hopefully your employer’s administrator(s) has already provided or can easily provide this information to you.

In general, there are two types of investment products offered by 403(b) plans: mutual funds and annuity products (Note certain churches also offer retirement income account investments). If available, mutual funds, and in particular target-date funds, are usually your best diversified, low-cost option. True to their name, target-date funds are mutual funds including a combination of stocks and bonds that gradually become more conservative as you reach your target-date of retirement. For instance, a 25-year-old in 2020 planning to retire at age 65 would invest his/her 403(b) in a 2060 target-date fund. Target-date funds generally have fairly low expense ratios and make your investing responsibilities SIMPLE as they take no effort by you to continuously update the diversification of your 403(b) portfolio. This simplifies your investing and allows you to focus your time and energy elsewhere!

However, some 403(b)s, especially those for K-12 teachers, do not offer mutual funds. If mutual funds are not available in your 403(b), you will need to consider your various annuity options (beware – annuities can get very complex):

  • Fixed Annuities: Insurance company makes a series of fixed, periodic payments to you (the annuity owner) for the duration of the contract (similar to CDs, except annuities aren’t insured by FDIC). For example, you could purchase a fixed annuity to provide a steady income over the rest of your life.
  • Variable Annuities: Insurance company makes a series of periodic payments to you (the annuity holder) for the duration of the contract based on the value of the investment options you choose. Investment options for a variable annuity are typically mutual funds that invest in stocks, bonds, money market instruments or some combination of the three.
  • Equity Indexed Annuities: Insurance company makes periodic payments to you (the annuity holder) based on (i) a minimum guaranteed interest rate and (ii) an interest rate linked to a market index, such as the S&P 500, the Dow Jones Industrial Average or the NASDAQ. The interest rate is not directly linked to the respective market index as it is in a variable annuity; rather, the insurance company uses a “participation rate” or other limit to reduce the market index’s impact to the total annuity interest rate. In this way, equity indexed annuities represent a mix of fixed and variable annuities (yes, these can get confusing!)

If your 403(b) offers both mutual funds and annuities, why are mutual funds, and in particular target-date funds, usually the better option? Annuities might seem attractive due to their “guaranteed” returns, but annuities usually result in higher taxes, higher fees/expenses, and specific restrictions hidden in details. To elaborate, when you withdraw money from an annuity, the gains are taxed as ordinary income (as high as 37% at the federal level), whereas gains on mutual funds held at least one year are taxed as long-term capital gains (15% for individuals in most tax brackets). In addition, as annuities are insurance products sold by salesmen making money on commissions, total fees and expenses (including commission fees and other annual fees) are oftentimes double or triple the size of those for mutual funds. Finally, annuities oftentimes include certain restrictions hidden in prospectus details, such as higher penalties for early withdrawals or minimum investment allocations.

When would annuities be the better option? In short, when you’re very risk-averse (such as close to retirement) and want guaranteed/predictable, albeit lower, income (including those concerned about outliving their funds). Annuities may also make sense if you’re looking for long-term care benefits or an equivalent to life insurance if you’re not eligible for these insurance benefits.

Finally, make sure you pay particular attention to investment expense ratios. An expense ratio is an annual fee representing the percentage of your investment that goes toward the costs of running a fund. For example, if you invest in a mutual fund with an expense ratio of 1%, you will pay $10 for every $1,000 invested each year. Over time, these fees can significantly drag down your investment returns, so it’s very important to pay attention to these ratios.

Considering expense ratios is even more important for 403(b) plans as the range of expense ratios and fees for your investment options can be substantial. Some 403(b) investment options can have fees over 2% per year and other high fees for early withdrawals (known as “surrender charges”). Others, such as those offered by Fidelity, Vanguard or TIAA-CREF, charge as low as 0 to 0.20% per year with no surrender charges. You will want to select an investment option in line with your desired investment portfolio with the lowest expense ratios and no/lowest surrender charges. As expense ratios vary depending on the type of investment and the cost to run the respective fund, generally you will want to select investments based on the following expense ratio criteria:

Setting up your 403(b):

As a benefit for those of you investing in 403(b) plans, most employees become eligible to participate in 403(b) plans immediately. Before your start date or soon thereafter, your employer should provide you a summary description of the plan, including a list of available plan administrators/investments and a link or instructions to access your benefits account or update your contribution percentage. If your employer does not provide these instructions or information about your benefits on or soon after your start date, contact the company’s HR department to ask about retirement account plans and associated instructions available to you.

Employers offering 403(b) plans usually hire multiple administrators, typically including various insurance companies and investment companies, to oversee the 403(b) plan.  If you have a choice between multiple administrators, make sure you evaluate both the administrator and its respective investments to determine which administrator has the best reputation and investment options for you (i.e., based on investment strategies, performance and expense ratios). Once you identify your plan administrator, access the administrator’s website (via a link or instructions from your employer) to create an account on the administrator’s website, or fill out a form to provide to your employer/administrator. Once you create an account, you will be able to select your 403(b) contribution percentage and the investments in which you will invest.

Once you have finalized your contribution percentage and investments, your employer will automatically deduct the funds from your paycheck to invest in the 403(b) on your behalf. You can monitor your 403(b) balance by logging into your account via the administrator’s website. If you have questions about your 403(b) balance/investments or want to shift money around, contact your 403(b) plan administrator.

 Options outside 403(b)

Due to the limited investment choices and high fees/expenses of some 403(b) plans, you should consider if you have a better option outside of your 403(b) plan. If you’re eligible to participate in a 403(b) plan, you may be eligible to participate in the following other plans instead:

457 Plan:  Despite having similar tax-advantages as 403(b) plans, 457 plans generally have more investment options with lower costs, potentially higher contribution limits and more-lenient early-withdrawal restrictions/penalties. If this is the case, you should strongly consider investing in a 457 plan before investing in your employer’s 403(b) plan. Refer to the post, Everything You Need to Know about a 457 for further information on 457 plans.

401(a) Plan: I know what you’re thinking…not more letters and numbers. Good news, you don’t need to remember too many more of these plan names. 401(a) plans are custom-designed money-purchase retirement plans usually only offered to key government, educational institution and nonprofit organization employees. These plans allow contributions by the employee, the employer or both; whereas employer contributions are mandatory, employee contributions can be voluntary or mandatory (i.e., irrevocable election of a certain dollar amount or percentage – be very, very cautious when considering this!).

Employers have much more control and discretion over 401(a) plans than they do for 401(k), 403(b) and 457 plans. In particular, employers usually set the employee and employer contribution limits (by dollar or percentage of pay), whether employee contributions are mandatory or voluntary and pre-tax or after-tax, the different investment options, eligibility criteria and vesting schedules. Employers can even create multiple 401(a) plans, each with different eligibility criteria and saving conditions. Due to this employer discretion, 401(a) plans can widely vary in their contribution limits, investment choices and terms, and the employee generally does not get to decide how much money goes into a 401(a) account.

Because these plans can vary widely based on employer discretion, you should closely research the terms and conditions of your 401(a) plan, if offered. This is especially important as you will want to obtain the maximum employer contribution (in your 401(a) plan as well as all other plans) before investing in another qualified retirement plan.

A 457 plan and a 401(a) plan are considered “supplemental” retirement plans. If your employer offers multiple plans, be sure to assess any mandatory contributions, the investment options, the investment costs and the relevant conditions of each plan. You should prioritize your plans to first obtain the maximum of any employer match and then invest your remaining retirement savings into the plan with the best, lowest-cost investments. This could require some hefty research on your part, but it will be worth it!

If you’ve already started investing in your 403(b) and are considering moving your money to one of the options above or another investment, be careful!! As mentioned earlier, many of the high-fee investments offered in 403(b) plans have expensive surrender charges over many years. Make sure you review your 403(b) plans and even contact the administrator to determine what fees or penalties would be imposed on you if you transfer your investments to another plan.

For any other 403(b) questions, feel free to leave a comment!


  1. https://www.irs.gov/retirement-plans/irc-403b-tax-sheltered-annuity-plans
  2. https://www.irs.gov/government-entities/federal-state-local-governments/government-retirement-plans-toolkit
  3. https://www.irs.gov/retirement-plans/governmental-plans-under-internal-revenue-code-section-401-a


  1. Making my daughter read this as this is the most thorough website on a 403(b) out there

    1. Very similar, but key differences in investment choices, vesting and an extra potential catch-up contribution. But as this post is “everything you need to know about a 403(b),” I want this post to stand on its own (i.e., readers do not have to reference material included in the post on a 401(k) as well).

    1. You’re not alone there. My preference is to keep my investments as simple as possible, which doesn’t leave much room for annuities

  2. “Contrary to 401(k)s which provide a comprehensive list of investment options, 403(b) plans typically offer two types of investment products: mutual funds and annuity products”…sounds like teachers get the short end of the stick again

    1. It really depends on the employer’s plan. It does, however, require teachers to be a little more proactive in researching their options (e.g., 403(b), 457 or 401(a))

  3. I wish I would have read this early in my career. I missed the employer match for serveral years, so hopefully others to not make the same mistake

  4. Shared this with a few friends in education and we all thought it was great. Keep it up

    1. Similar to my response to Ted, above, yes, but there are key differences in investment choices, vesting and an extra potential catch-up contribution. But as this post is “everything you need to know about a 403(b),” I want this post to stand on its own (i.e., readers do not have to reference material included in the post on a 401(k) as well).

  5. I googled 403(b) and found this gem. Never heard of this but very clear and helpful. I don’t know if you are still posting but I subscribed so please do

    1. Thanks for your support, Lacey. Yes, the blog is just getting started. Hope you enjoy!

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