Top 403(b) Plan Questions Answered

How 403(b) plans work

The 403(b) plan has been around for a long time, but compared to the 401(k)—its more famous retirement plan cousin—it gets little attention. This quick question and answer session can help you get the most out of your 403(b) plan.

Key Takeaways

  • A tax-advantaged retirement plan, 403(b)s are typically offered to employees at public schools, colleges, and universities, as well as to employees of tax-exempt organizations, including churches and charities.
  • Investment options offered in 403(b) plans include mutual funds and annuities.
  • The contribution limits are the same as for 401(k) plans, although there are additional catch-up provisions for eligible employees.

Who Can Invest in a 403(b) Plan?

Think of 403(b) plans as 401(k) plans designed for public school, college, and university employees, as well as for employees of certain tax-exempt organizations, including churches and charities. The analogy isn't perfect because 401(k) and 403(b) plans have different rules, but it's close. Both of these plans offer participants a tax-advantaged way to save for retirement.

Can Part-Time Workers Participate?

If you are a part-time worker, you can participate in a 403(b) plan provided you generally work at least 20 hours per week. You must contribute at least $200 per year to the plan, and you must not be participating in another 403(b) plan.

Why Should I Invest in a 403(b) Plan?

Like IRAs and 401(k) plans, 403(b) plans help investors build up a nest egg that can be used as income during retirement. Employers generally offer matching contributions to 403(b) plan investors, essentially giving you free money to help fund your retirement. Even if you are affluent or extremely risk-averse, passing up free money is probably not a wise decision.

Since most 403(b) plans offer a money market fund as one of the investment options, you could tuck your contribution and your match in there and hold it with relatively little risk compared to the potential fluctuations of mutual funds that invest in stocks and bonds.

My 403(b) Plan Offers an Annuity. Should I Invest in It?

When the 403(b) was invented in 1958, it was known as a tax-sheltered annuity. While times have changed, and 403(b) plans can now offer a full suite of mutual funds similar to those available in 401(k) plans, many still offer annuities. Financial advisors often recommend against investing in annuities in a 403(b) and other tax-deferred investment plans for a variety of reasons.

The first reason is that annuities are designed to provide tax-deferred growth. Since tax-deferred investment plans already offer that feature, investing in a vehicle (annuity) designed to provide the same feature is redundant.

Many investors lack the time, patience, or knowledge to fully evaluate the annuity offerings in their 403(b) plans.

Second, annuities often charge high fees. High fees detract from investment performance, as every penny spent on fees is a penny taken away from your investment returns. In addition, paying a high fee for an investment that offers a benefit (tax deferral) that you already get from the provisions of the 403(b) plan is not generally viewed as a wise way to spend money.

Third, annuities often levy surrender charges if you transfer your assets out of them prior to the passage of a predetermined period that is often set at several years. Locking up your money for such a long period of time severely limits your flexibility in making investment decisions. At the same time, annuities are complex investments that often include a significant amount of fine print.

Finally, variable annuities, which offer a variable payout based on the performance of underlying investments, can lose money. Investing in an overpriced vehicle that can lose money is generally not a good idea.

Of course, annuities also come in another flavor—the fixed annuity. Fixed annuities offer a guaranteed payout. If you are a conservative investor and your 403(b) offers a fixed annuity, it may be an appealing place to put your money.

Do 403(b) Plans Offer a Brokerage Account Option?

Under the rules that govern 403(b) plans, the only permissible investments are mutual funds and annuities. Participants in 403(b) plans can invest in stocks indirectly through mutual funds, but cannot invest directly in stocks.

How Does the Catch-Up Provision Work?

Contribution limits for 403(b) plans are the same as for 401(k)s. According to the IRS, the annual contribution limit is $20,500 in 2022 and rises to $22,500 for 2023.

Participants in 403(b) plans can also enjoy the benefits of two catch-up provisions. If you are age 50 or above, you are eligible to make the same catch-up contribution that 401(k) plan participants can make. In 2022, that means an extra $6,500, and for 2023, the catch-up contribution is $7,500.

If you have been contributing to the plan for at least 15 years you are also eligible for another catch-up provision. Under this provision, you may contribute an additional $3,000 a year up to a lifetime limit of $15,000. And unlike the usual retirement-plan catch-up provisions, you don't have to be 50 or older to take advantage of this.

Required Minimum Distributions

Like 401(k) accounts, holders of 403(b) accounts need to take required minimum distributions (RMD) after reaching age 73 in 2023 and 75 in 2033.

The Bottom Line

The 403(b) is less popular than the 401(k) plan, as it is only available to certain types of employees. It has a lot to offer for those who are able to contribute. The common questions answered above will help you take advantage of the benefits of a 403(b) plan.

Article Sources
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  1. Internal Revenue Service. "Retirement Plans FAQs Regarding 403(b) Tax-Sheltered Annuity Plans."

  2. Internal Revenue Service. "IRC 403(b) Tax-Sheltered Annuity Plans."

  3. National Tax-Deferred Savings Association. "Are ETFs and Self-Directed Brokerage Accounts Available in 403(b) Plans?"

  4. Internal Revenue Service. "Section 403(b) Tax-Sheltered Annuity Arrangements," Page 1.

  5. U.S. Securities and Exchange Commission. "Annuities."

  6. U.S. Securities and Exchange Commission. "Variable Annuities."

  7. U.S. Securities and Exchange Commission. "Variable Annuities: What You Should Know," Page 3.

  8. U.S. Securities and Exchange Commission. "Evaluating Your Retirement Options."

  9. Internal Revenue Service. “401(k) Limit Increases to $22,500 for 2023, IRA Limit Rises to $6,500.”

  10. Internal Revenue Service. "403(b) Plan Fix-It Guide - An Employee Making a 15-years of Service Catch-up Contribution Doesn’t Have the Required 15 Years of Full-time Service with the Same Employer."

  11. United States Senate Committee on Finance. "SECURE 2.0 Act of 2022," Page 2.

  12. Internal Revenue Service. "RMD Comparison Chart (IRAs vs. Defined Contribution Plans)."

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