From Bogleheads

The 403(b) is a tax deferred, defined contribution plan available to employees of educational institutions such as public school districts and certain (Internal Revenue Code section) 501(c)(3) non-profit groups, which include colleges, universities, hospitals, charities and the clergy.[1]

Plan basics

Contributions to a 403(b) plan are tax-deductible, and any earnings accumulate tax-free until withdrawals are made. Withdrawals are taxed at ordinary income rates, and a 10% penalty tax is assessed on withdrawals made prior to the age of 59 ½.

Employees may contribute up to 100% of their salaries, subject to the following limits:

Contribution Limits[2]
Year Under Age 50 Age 50 or Older
2007 $15,000 $20,500
2008 $15,500 $20,500
2009 - 2011 $16,500 $22,000
2012 $17,000 $22,500
2013-2014 $17,500 $23,000
2015-2017 $18,000 $24,000
2018 $18,500 $24,500
2019 $19,000 $25,000
2020-2021 $19,500 $26,000
2022 $20,500 $27,000
2023 $22,500 $30,000

Roth 403(b)

Beginning in 2006, 403(b) plans have been allowed the option of providing a Roth 403(b). The Roth 403(b) allows individuals to contribute after-tax dollars to grow tax free and, generally, not be taxed upon withdrawal.[note 1] If the plan contains a Roth option, an employee can direct 403(b) contributions to a regular 403(b), a Roth 403(b), or some combination of the two plans; the total contribution cannot exceed the annual contribution limit.[3]

A Roth 403(b), is generally subject to required minimum distributions,[4] after you have retired and attained age 72½.[5] To avoid required minimum distributions, an individual can execute a trustee-to-trustee transfer of the Roth 403(b) account to a Roth IRA upon terminating employment.

A Roth 403(b) may be attractive under the following circumstances:

  • If you expect your tax rate in retirement will be higher than it had been during the years you contributed.
  • If you are young and want to use a long investment horizon to accumulate tax-free earnings under a Roth feature.
  • If you are a highly compensated individual who would like to have a pool of tax-free money to draw upon after retirement, and who are not eligible for Roth IRAs due to the income limitations.
  • If you want to leave tax-free money to heirs.[5]

Fifteen year rule

Employees with 15 or more years of service with public school systems, hospitals, home health service agencies, health and welfare agencies, churches, or convention or associations of churches may be able to qualify for a Salary Reduction Catch-Up. This option is only available to those whose prior contributions have averaged less than $5,000 per year. If this qualification is met, the employee may be able to defer an extra $3,000 per annum in catch-up contributions (to a lifetime maximum of $15,000).[3] In the ordering of contributions, the IRS deems that the 15 year service catch-up contributions precede the age 50 catch-up contributions.[6][note 2]


Andrea Miller, age 51, makes a $22,500 contribution to her 403(b) plan in 2016. The IRS allocates the contribution as follows:

  • Regular contribution : $18,000
  • 15 year service catch-up: $3,000
  • Over 50 catch-up: $1,500

Andrea Miller's remaining lifetime 15 year service catch-up total is reduced to $12,000.


Basic rules regarding distributions from a 403(b) plan include:

  • A withdrawal of assets prior to age 59-1/2, will be taxable at income tax rates and will result in the IRS imposing a 10 percent penalty tax (unless certain criteria are met.)[note 3]
  • Penalty-free withdrawals are allowed upon retirement (assumed to be in or after the year in which you reach age 55).[3]
  • Generally, required minimum distributions, must begin from a 403(b) no later than April 1 of the year following the year in which an individual turns age 72. If you are still working, you can delay withdrawal from your 403(b) until April 1 following the year in which you retire.[3]
  • 403(b) account balances that existed on December 31, 1986 are not subject to the age 70-1/2 distribution requirement. However, any earnings on that balance are. Distribution from the 12/31/86 balance needs to start at age 75. (This situation is complex, and consulting a professional tax advisor is recommended.)[3]

If you own more than one 403(b), required minimum distributions are calculated in a manner similar to an IRA. You must calculate the RMD separately for each 403(b) contract that you own, but can take the total amount from one or more of the 403(b) contracts.[note 4]


A number of tax-free transfers and rollovers of 403(b) plans are permissible under the tax laws.

  • Contract exchanges. If you transfer all or part of your interest from a 403(b) contract to another 403(b) contract (held in the same plan), the transfer is tax free, and is referred to as a contract exchange. This was previously known as a 90-24 transfer. A contract exchange is similar to a 90-24 transfer with one major difference. Previously, you were able to accomplish the transfer without your employer’s involvement. After September 24, 2007, all such transfers are accomplished through a contract exchange requiring your employer’s involvement. In addition, the plan must provide for the exchange and the transferred interest must be subject to the same or stricter distribution restrictions. Finally, your accumulated benefit after the exchange must be equal to what it was before the exchange.[7]
  • If you leave your employer assets can be transferred to your new employer's defined contribution plan, if permitted by that plan.[3]
  • After leaving your employer, assets may be moved to a Rollover Individual Retirement Account (IRA).[3]


The advantages a 403(b) plan offers include the following.[8]

  • High contribution limits allow an individual to tax defer more investment dollars than can be contributed to individual retirement plans.
  • Contributions to a regular 403(b) are tax deductible. Tax deductible contributions are especially advantageous if the tax rate is lower when retirement income withdrawals are made. If a Roth option is available, contributions made at low tax rates are advantageous if the tax rate is higher when retirement withdrawals are made.
  • Contributions made to a 403(b) qualify for the Retirement Savings Contributions Credit (Saver's Credit) if you meet the filing and income requirements.[9]
  • Employer's can make matching contributions to employee contributions.
  • Some plans may have loan provisions.[note 5]
  • If a 403(b) plan offers very low-cost investment options (such as those offered by TIAA-CREF in the university retirement plan market, or by a low cost mutual fund company) investors can reap most of the returns investment markets provide. Unfortunately, the 403(b) marketplace, especially in the K-12 school environment, is primarily populated by high cost, commissioned annuity products.[10][11]
  • 403(b) plans allow employees who have fifteen years of service to an employer to make up to $15,000 of catch up contributions to the plan.
  • Participants who are eligible for both a 403(b) and a 457(b) through their employer can contribute the maximum of both plans, which at $18,000 each is a combined $36,000.[note 6]


Value after 35 years, assuming $250 contributed monthly with an 8 percent average annual return.

Since the 403(b) is heavily tied to the insurance industry,[note 7] a common option of 403(b) plans is a tax-sheltered fixed annuity or a variable annuity. These products often come with an extra layer of fees and restrictions such as surrender charges;[note 8] furthermore, the extra tax-deferral features of the annuity are unnecessary since the 403(b) is already a tax-deferred account.[12]

Mutual funds are a possible option (known as 403(b)(7) custodial accounts) only if they are an available option within the plan. If mutual funds are not available in the 403(b) the participant should consider lobbying the employer to offer some lower fee mutual funds. If you are in this situation see How to campaign for a better 403(b) plan for information on how to proceed.

The following table provides a summary of 2014 year end 403(b) assets as well as the distribution of assets across annuity and mutual fund investment platforms.

403(b) Plan Net Assets (12-31-2014) in billions[13]
2014 Fixed Annuity Variable Annuity Mutual Funds Total Assets
Net Assets 464 351 260 1075
Percentage 43% 33% 24% 100%

See also


  1. A qualified Roth 403(b) distribution is generally a distribution that is made after a 5-taxable-year period of participation and is either:
    1. made on or after the date you attain age 59½
    2. made after your death, or
    3. attributable to your being disabled.
    When you roll over a distribution from a designated Roth account to a Roth IRA, the period that the rolled-over funds were in the designated Roth account does not count toward the 5-taxable-year period for determining qualified distributions from the Roth IRA. However, if you had contributed to any Roth IRA in a prior year, the 5-taxable-year period for determining qualified distributions from a Roth IRA is measured from the earlier contribution. So, if the earlier contribution was made more than 5 years ago and you are over 59 ½ a distribution of amounts attributable to a rollover contribution from a designated Roth account would be a qualified distribution from the Roth IRA.
    If you take a distribution from your designated Roth account before the end of the 5-taxable-year period, it is a nonqualified distribution. You must include the earnings portion of the nonqualified distribution in gross income. However, the basis (or contributions) portion of the nonqualified distribution is not included in gross income. The basis portion of the distribution is determined by multiplying the amount of the nonqualified distribution by the ratio of designated Roth contributions to the total designated Roth account balance.
    For example, if a nonqualified distribution of $5,000 is made from your designated Roth account when the account consists of $9,400 of designated Roth contributions and $600 of earnings, the distribution consists of $4,700 of designated Roth contributions (that are not includible in your gross income) and $300 of earnings (that are includible in your gross income). See FAQ's on Designated Roth Accounts, IRS.
  2. For detailed rules regarding the Fifteen Year Rule consult Publication 571 Tax Sheltered Annuity Plans (403(b)Plans), IRS
  3. Withdrawals are taxable unless one meets one of the following exclusions:
    • Attain age 59-1/2
    • Separate from service in or after the year in which you reach age 55
    • Part of a series of substantially equal periodic payments for your life or the joint lives of you and your designated beneficiary
    • Hardship
    • Disability
    • Death
    • Made due to an IRS levy upon your participant account
    • Paid to an alternative payee under a qualified domestic relations order
    • Is a qualified reservist distribution as defined under the Pension Protection Act of 2006
    • Is a payment of qualified medical expenses greater than 7.2% of your adjusted gross income.
    Source: 403bwise FAQ
  4. This is similar to an IRA, where an IRA owner must calculate the RMD separately for each IRA that he or she owns, but can withdraw the total amount from one or more of the IRAs. However, RMDs required from other types of retirement plans, such as 401(k) and 457(b) plans have to be taken separately from each of those plan accounts. Reference: Retirement Plans FAQs regarding Required Minimum Distributions, from the IRS.
  5. IRS stipulations regarding 403(b)loans limits loans to the lesser of:
    • $50,000
    • One half of account value
    The individual vendor may put additional restrictions on loan provisions. See assessing 403(b)savings, 403(b)wise.com
  6. See 457(b)wise FAQ for more information on 457(b) plans
  7. History of the 403(b) Plan
    • 403(b) programs were originally created in 1958 by Congress for employees of tax-exempt corporations.
    • In 1961, public education institutions, including public school districts, became eligible to offer 403(b) plans.
    • In 1973, Congress passed a law allowing employees to make tax-free exchanges of the full account value from one 403(b) plan to another, and partial transfers have been allowed since 1992.
    • In 1974, Congress passed the Employee Retirement Income Security Act (ERISA), which included a provision allowing 403(b) plans to increase the number of their investment options and offer mutual funds in addition to annuities.
    • In 1978, a law was passed allowing employees to roll 403(b) assets into a traditional IRA.
    • Starting in 1982, with the passage of the Tax Equity and Fiscal Responsibility Act, 403(b) participants were allowed to take loans from their plans. Additionally, religious organizations were permitted to set up Retirement Income Accounts, a specialized form of 403(b) plan.
    • In 1986, another tax law imposed restrictions on withdrawals before age 59½ and made them subject to a 10 percent early withdrawal penalty. Additionally, required minimum distributions (after age 70½) were established along with new limits on elective deferrals. The limit established then, $9,500 per person per year, remained in effect until 1998.
    • A 1992 IRS ruling allowed employees to make tax-free full or partial account transfers from annuities to 403(b)(7) mutual fund accounts.
    • The 2001 tax bill, which took effect in 2002, allowed 403(b) participants to roll their money into a 401(k) or governmental 457 plan when changing jobs, in addition to an IRA or other 403(b). Similarly, employees with savings in 401(k) or governmental 457 plans may roll their contributions into a 403(b) plan, if offered by their new employer. The tax bill also simplified the formula used to calculate an employee's annual contribution limit.
    • On July 23, 2007, the IRS finalized new regulations (set to go into full effect January 1, 2009) for public 403(b) retirement plans. The main highlights include:
      • Requirement that a 403(b) program be maintained pursuant to a written plan which satisfies section 403(b) in both form and operation and contains all the terms and conditions for eligibility, limitations, and benefits under the plan.
      • End to traditional 90-24 outside-of-plan transfers.
      • Requirement to provide annual notification of eligibility
      • Clarification of universal availability
      • New information sharing requirements between employers and vendors.
  8. According to the SEC Evaluating Your Retirement Options:

    For example, if you withdraw money from a variable annuity within a certain period after a purchase payment (typically within six to eight years, but sometimes as long as ten years), the insurance company usually will assess a "surrender" charge. A surrender charge is a type of sales charge that compensates the financial professional who sold the variable annuity to you. Generally, the surrender charge is a percentage of the amount you sell or exchange, and it will decline gradually over a period of several years, known as the "surrender period." For example, a 7% charge might apply in the first year after a purchase payment, 6% in the second year, 5% in the third year, and so on until the eighth year, when the surrender charge no longer applies. Some variable annuity contracts will allow you to withdraw part of your account value each year — 10% or 15% of your account value, for example — without paying a surrender charge.


Further reading

Simon's commentary

W. Scott Simon, who writes a monthly Fiduciary Focus column for Morningstar has an eight part series on the 403(b) Plan universe. These plans have been affected by regulation changes effective since January 1, 2009. This series is especially valuable for 403(b) plan providers.

External links