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Account & Regulation

403(b)

A retirement plan for employees of public schools, universities, churches, and certain nonprofits. Similar to a 401(k) in structure and contribution limits, with investments typically in annuities or mutual funds.

What is a 403(b)?

A 403(b), also called a tax-sheltered annuity plan, is a retirement plan offered by public schools, colleges, religious organizations, and certain nonprofit employers. It functions much like a 401(k): employees defer part of their salary pre-tax, investments grow tax-deferred, and withdrawals in retirement are taxed as ordinary income.

Key features

  • Same contribution limits as 401(k): employee deferral and catch-up limits match
  • Pre-tax or Roth: most plans offer both options
  • Employer match: varies by employer, less common than in corporate 401(k)s
  • Investment menu: historically annuity contracts; modern plans often offer mutual funds. Plan quality varies widely by employer
  • Extra catch-up: some employees with 15+ years of service get an additional catch-up on top of the age-50 catch-up
  • Similar withdrawal rules: 10% penalty before age 59½, ordinary income tax on distributions

Things to watch for

403(b) plans historically have had higher fees than corporate 401(k)s because many still use annuity products. If your employer offers a low-cost mutual-fund option, take it. Review the expense ratios of available investments; small differences compound to large amounts over a career.

Related Terms

401(k)

An employer-sponsored retirement plan where employees defer part of their salary into tax-advantaged investments. Contributions are pre-tax, growth is tax-deferred, and many employers offer a matching contribution.

457(b)

A deferred compensation plan for state and local government employees and some nonprofits. Separate contribution limit from 401(k) and 403(b), and no early withdrawal penalty at separation of service.

HSA

A Health Savings Account: a triple-tax-advantaged account for medical expenses. Contributions are deductible, growth is tax-free, and qualified medical withdrawals are tax-free. Often used as a stealth retirement account.

Roth 401(k)

A 401(k) variant funded with after-tax dollars. Investments grow tax-free and qualified withdrawals in retirement are tax-free, combining the high contribution limits of a 401(k) with the Roth tax treatment.

Roth IRA

A retirement account funded with after-tax dollars. Investments grow tax-free, and qualified withdrawals in retirement are completely tax-free, including all earnings.

SEP IRA

A retirement account for self-employed individuals and small business owners. Much higher contribution limits than a standard IRA, and contributions are tax-deductible.