Quick Facts
✔ A 403(b) is a retirement plan for public school and nonprofit employees.
✔ Contributions are usually made through payroll deductions.
✔ Traditional 403(b) contributions are often pre-tax.
✔ A 403(b) is similar to a 401(k), but it applies to different employers.
✔ Plan rules and options can vary by employer.
What's In This Guide
- What Is a 403(b) Retirement Plan?
- Participation in a 403(b) Plan
- Benefits of Contributing to a 403(b) Plan
- How a 403(b) Plan Is Set Up
- Choosing a 403(b) Plan
- Frequently Asked Questions About 403(b) Plans
- Bottom Line
Planning for retirement often involves understanding the different types of employer-sponsored savings plans available to workers.
While many people are familiar with 401(k) plans, employees in public education and nonprofit organizations may have access to another option called a 403(b).
Here's a closer look at how a 403(b) plan works and what it means for retirement savings.
What Is a 403(b) Retirement Plan?
A 403(b) retirement plan [1], sometimes called a tax-sheltered annuity plan, is a tax-advantaged retirement savings account designed for employees of certain public and nonprofit organizations.
It allows eligible workers to contribute a portion of their salary through payroll deductions, and employers may also contribute to the plan. Contributions are invested and can grow over time to support retirement income.
Eligible participants commonly [1] include:
- Employees of 501(c)(3) tax-exempt nonprofit organizations[2]
- Employees of public school systems, including teachers and staff
- Employees of state colleges and universities
- Employees of churches or church-related organizations
- Ministers employed by nonprofit organizations
- Self-employed ministers are treated as employees of a qualified tax-exempt organization
- Chaplains or ministers performing ministerial duties for non-tax-exempt organizations
- Employees of public school systems organized by Indian tribal governments
403(b) vs. 401(k): What’s the Difference?
A 403(b) and a 401(k) are both employer-sponsored retirement plans that let employees save through payroll deductions. In both plans, employees can contribute part of their wages to an individual retirement account, and employers may also contribute.
The main difference is who can offer the plan.
A 401(k) [3] is usually offered by for-profit employers. Employee contributions are generally made before taxes, unless the plan offers a Roth option. Withdrawals in retirement are usually taxed, except for qualified Roth distributions.
A 403(b) is offered by public schools and certain 501(c)(3) tax-exempt organizations. It works in a similar way, allowing employees to save for retirement through individual accounts with possible employer contributions.
Key Difference at a Glance
- 401(k): Commonly offered by private, for-profit employers
- 403(b): Commonly offered by public schools and eligible nonprofit organizations
Participation in a 403(b) Plan
Tax Benefits of Participating
Joining a 403(b) plan [1] can offer important tax advantages. In many cases, contributions are made on a pre-tax basis, which can reduce taxable income in the year the money is contributed. The money in the account also grows tax-deferred, so taxes are usually not paid until funds are withdrawn.
When Employees Can Enroll
The timing for joining a 403(b) plan [1] depends on the employer’s plan rules. In general, many plans must allow eligible employees to participate starting on their employment start date. Employees should check with their employer or human resources department to understand when they can enroll and how the process works.
Automatic Enrollment Options
Some 403(b) plans may include automatic enrollment [1]. Under this setup, eligible employees are enrolled in the plan automatically unless they choose to opt out. This can make it easier for employees to begin saving for retirement early.
Benefits of Contributing to a 403(b) Plan
Contributing to a 403(b) retirement plan can provide several financial and tax advantages [4] that support long-term retirement savings. Here are some key benefits of participating in a 403(b) plan.
Tax Benefits Today
One of the main benefits of contributing to a 403(b) plan is the potential tax advantage. If you make traditional 403(b) contributions, you generally do not pay income tax on those contributions in the year they are made. This can lower your current taxable income.
Tax-Deferred Growth
Money in a traditional 403(b) can grow tax-deferred over time. That means earnings and investment gains are usually not taxed each year. Instead, taxes are generally paid when you begin taking withdrawals, often during retirement.
Roth 403(b) Tax Treatment
Some employers offer a Roth 403(b) option. With a Roth account, contributions are made with after-tax dollars, so they do not reduce taxable income today. However, qualified withdrawals in retirement, including earnings, may be tax-free if the required conditions are met.
Potential Tax Credit
Some participants may also qualify for a retirement savings contributions credit, sometimes called the saver’s credit. This tax credit may be available for eligible elective deferrals made to a 403(b) plan, depending on income and filing status.
Long-Term Savings Value
Because contributions can receive favorable tax treatment and investment growth may be sheltered from current taxes, a 403(b) can be a useful tool for building long-term retirement savings.
How a 403(b) Plan Is Set Up
A 403(b) plan can generally be set up [5] only by public educational institutions and 501(c)(3) tax-exempt organizations. Certain church plans may also qualify under specific rules.
Step 1: Create a Written Program
Most 403(b) plans must have a written program [6]. This document explains how the plan works and includes the required rules for participation, contributions, and plan administration.
Step 2: Choose the Type of Account
A 403(b) plan is funded through individual participant accounts. These accounts are usually set up as:
- Annuity contracts through an insurance company
- Custodial accounts invested in mutual funds
- Retirement income accounts for certain church employees
A 403(b) cannot be funded with life insurance or certain other insurance products. Employers also need to make sure the investment contracts match the terms of the written plan.
Step 3: Handle Required Plan Identification
Some 403(b) plans may need a plan identification number for reporting and compliance purposes. This often depends on whether the plan is subject to ERISA [7] and other federal rules.
Step 4: Give Employees Required Plan Information
If the plan is subject to ERISA, the employer may need to provide employees with key plan information, such as a summary of benefits and plan rules. The employer may also have fiduciary and reporting responsibilities under federal law.
Choosing a 403(b) Plan
A 403(b) plan is a retirement plan offered by public schools and certain nonprofit organizations. It is similar to a 401(k), but it is designed for employees of schools, churches, and eligible charities.
With a traditional 403(b), employees can contribute part of their paycheck before taxes, which may lower taxable income now. Some plans [5] also offer a Roth 403(b), where contributions are taxed now but qualified withdrawals in retirement may be tax-free.
Who Can Offer a 403(b)?
A 403(b) plan may be offered by:
- Public schools, colleges, and universities
- Churches
- 501(c)(3) tax-exempt organizations
What to Check
When choosing a 403(b) plan, it helps to look at:
- Contribution options
- Employer contributions
- Available investments
- Plan fees
- Loan or hardship withdrawal options
Keep in mind that contribution limits apply, and early withdrawals may be subject to taxes and penalties.
Frequently Asked Questions About 403(b) Plans
Can I Withdraw From 403(b) while still employed?
Yes, in some cases, you can withdraw from a 403(b) [1] while still employed, but only if your plan allows it. Access may be available through a loan, a hardship withdrawal, or an in-service withdrawal after age 59½. Because rules vary by plan, it is important to check your employer’s plan details before requesting a distribution.
Is a 403(b) better than a 401(k)?
Neither plan is inherently better. When comparing 403b vs 401k, the most important factors are the employer’s plan features, investment options, and associated fees.
How often should you review your 403(b) account?
Many people review their retirement accounts at least once a year. Checking your balance, contributions, and investment selections can help ensure your savings plan continues to match your long-term goals.
What information do employees need before enrolling in a 403(b)?
Before enrolling, employees often review the plan’s contribution rules, available investment options, fees, and employer contribution policies to understand how the plan works.
Can some employees be excluded from a 403(b) plan?
Yes. In some cases, a 403(b) plan may exclude certain employees [1] from participation for elective deferrals. This can include employees who normally work fewer than 20 hours per week, employees expected to contribute very small amounts, employees already participating in another eligible employer plan, certain nonresident aliens, and some student workers. Eligibility rules can vary, so employees should review their employer’s plan details.
Bottom Line
A 403(b) retirement plan can be a valuable savings option for employees of public schools, nonprofits, and certain religious organizations. It offers tax advantages, automatic payroll contributions, and the potential for long-term growth. Understanding contribution rules, investment choices, and withdrawal rules can help employees make more informed retirement decisions.
Retirement planning often involves reviewing tax treatment, contribution limits, and plan features. Looking closely at your employer’s plan can help you choose an approach that supports your long-term goals.
Saranac Tax Services works with individuals and families across New York to review retirement-related tax considerations and explain how accounts such as 403(b) plans may fit into a broader financial strategy.
Schedule a consultation with Saranac Tax Services to learn more about your retirement planning options.
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DISCLAIMER: The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. Some of this material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named representative, broker-dealer, state - or SEC - registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.
Sources:
- Retirement plans FAQs regarding 403(b) tax-sheltered annuity plans | Internal Revenue Service. (2025, August 26).https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-403b-tax-sheltered-annuity-plans
- Exemption requirements - 501(c)(3) organizations | Internal Revenue Service. (2026, January 30). https://www.irs.gov/charities-non-profits/charitable-organizations/exemption-requirements-501c3-organizations
- 401(k) plans | Internal Revenue Service. (2026, January 30). https://www.irs.gov/retirement-plans/401k-plans
- 403(b) plan fix-it guide - 403(b) plan overview | Internal Revenue Service. (2025, November 16). https://www.irs.gov/retirement-plans/403b-plan-fix-it-guide-403b-plan-overview
- IRC 403(b) tax-sheltered annuity plans | Internal Revenue Service. (2026, January 30). https://www.irs.gov/retirement-plans/irc-403b-tax-sheltered-annuity-plans#3
- IRC 403(b) tax-sheltered annuity plans — Written program | Internal Revenue Service. (2026, January 30). https://www.irs.gov/retirement-plans/irc-403b-tax-sheltered-annuity-plans-written-program
- Retirement plans definitions | Internal Revenue Service. (2025, August 26). https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-plans-definitions