403(b)

Also called tax-sheltered annuity, TSA

A retirement plan, similar to a 401(k), for employees of public schools, many tax-exempt nonprofits and certain ministers.

What it means

A 403(b) works much like a 401(k): employees contribute through payroll, often before income tax, and the money grows tax-deferred until withdrawal. Many plans also offer a Roth option. It is available to employees of public schools and colleges, many charities and hospitals organized as tax-exempt organizations, and some members of the clergy.

Historically, 403(b) plans held annuity contracts sold by insurance companies, and many still do, alongside mutual fund options. The IRS sets the annual contribution limit, which is shared with any 401(k) the same person contributes to in that year. Withdrawal rules, including the 10% additional tax on most withdrawals before 59½, mirror those of a 401(k).

Example

Suppose a teacher earning $50,000 contributes 5% of pay, or $2,500 a year, to a 403(b), and the school matches half of that, adding $1,250. Together, $3,750 goes into the account that year.

How it’s used

Teachers and school staff saving for retirement
Nonprofit and hospital employees
Supplementing a public pension

Strengths and weaknesses

Strengths

Payroll deduction and tax-deferred growth, like a 401(k)
Often paired with a 457(b), which has a separate limit
Some offer a Roth option and employer contributions

Weaknesses

Some plans lean on annuity products with high fees or surrender charges
Smaller employers may offer limited or costly investment menus
Same early withdrawal restrictions as a 401(k)

Good to know

Compare the costs of annuity options with any low-cost mutual funds on the menu before choosing investments.

Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.