403(b)(7) Custodial Account: Contribution Limits, Withdrawals, and RMDs

A 403(b)(7) custodial account is a retirement savings account for employees of public schools and 501(c)(3) tax-exempt organizations, held by a bank or similar custodian and invested in mutual funds. It’s one of three funding vehicles allowed under Internal Revenue Code Section 403(b), and the “(7)” points to the subsection of the code that authorizes the custodial-account structure specifically.¹ For 2026, you can defer up to $24,500 of your salary into the account, with higher ceilings if you’re older or have long tenure with the employer.

What Sits Inside the Account

The custodian holds the assets, processes transactions, and handles tax reporting on your behalf. By statute, the money in a 403(b)(7) can only be invested in regulated investment company stock or qualifying group trusts. In practice, that means mutual funds. Individual stocks, bonds, ETFs, and annuity contracts are not permitted inside this account structure.¹

That’s the key line separating this vehicle from a 403(b)(1) plan, which is funded through an annuity contract issued by an insurance company.² Same tax code section, different investment universe.

If your employer’s plan allows it, you can also make designated Roth contributions. Roth dollars go in after tax, and qualified withdrawals come out tax-free later. The plan has to keep a separate accounting record for all Roth contributions and their gains and losses.³ Traditional pre-tax contributions remain the default, and they’re taxed as ordinary income when you eventually withdraw them.

How Much You Can Contribute in 2026

Your contributions typically flow in through a salary reduction agreement, where your employer withholds part of your pay and deposits it directly into the account.⁴ For 2026, the IRS caps your own elective deferrals at $24,500.⁵

When you fold in any employer matching or non-elective contributions, the combined total across all 403(b) accounts you have cannot exceed the lesser of $72,000 or 100% of your includible compensation for 2026.⁶ Employer contributions do not require a salary reduction agreement.

Catch-Up Contributions for Older and Long-Tenured Employees

Several provisions let you go beyond the $24,500 base. They stack in a defined order, and which one applies depends on your age and your years of service.

Age 50 and Older

If you turn 50 or older by December 31, 2026, you can add another $8,000, taking your personal ceiling to $32,500.⁵

Ages 60 Through 63

Under SECURE 2.0, participants aged 60, 61, 62, or 63 get a higher catch-up tier. For 2026, that group can contribute up to $11,250 in catch-up money instead of the standard $8,000, lifting the maximum deferral to $35,750. Once you turn 64, you drop back to the regular age-50 amount.⁵

15 Years of Service

A separate catch-up is available if you’ve worked at least 15 years for the same qualifying employer, a category that includes public school systems, hospitals, churches, and certain health and welfare agencies. It lets you defer an extra $3,000 per year, capped at $15,000 over your lifetime. The actual amount you can use in a given year is the smallest of $3,000, the remaining lifetime cap, or $5,000 times your years of service minus all prior elective deferrals to that employer’s plans.⁷

If you qualify for both the 15-year service catch-up and an age-based catch-up, the 15-year amount is applied first. Any remaining room under the age-based catch-up comes next.⁵

Mandatory Roth Catch-Up for High Earners

Starting January 1, 2026, SECURE 2.0 Section 603 requires anyone who earned $150,000 or more in FICA-taxable wages from their employer during the prior calendar year to make all catch-up contributions on a Roth basis. If your 2025 wages from the employer were under $150,000, you can still choose between pre-tax and Roth catch-up contributions, assuming the plan offers both. The rule applies to 403(b), 401(k), and 457(b) plans.

When You Can Take Money Out

The tax code tightly restricts distributions from a 403(b)(7). Money can come out only when one of these events occurs: you reach age 59½, you separate from service, you become disabled, or you die.¹ Hardship withdrawals are also allowed under certain conditions.

Pre-tax withdrawals are taxed as ordinary income whenever you take them. If you take money out before age 59½, the IRS generally adds a 10% early distribution tax on top of the regular tax.⁸

Several exceptions let you avoid the 10% penalty while still owing ordinary income tax:

Separation from service at age 55 or later. If you leave your job during or after the year you turn 55, penalty-free withdrawals from that employer’s plan open up. Public safety employees of state or local governments qualify at age 50.
Substantially equal periodic payments (SEPP), calculated based on your life expectancy and taken at least annually.
Total and permanent disability, as defined under IRC Section 72(m)(7).
Unreimbursed medical expenses, but only the portion exceeding 7.5% of your adjusted gross income.
Distributions to an alternate payee under a Qualified Domestic Relations Order, typically issued in a divorce.
Domestic abuse victims can withdraw up to the lesser of $10,000 (indexed for inflation) or 50% of the account balance without penalty. SECURE 2.0 added this for distributions after December 31, 2023.

All of these exceptions apply to 403(b) accounts.⁸

Hardship Withdrawals

A hardship withdrawal is available when you can show an immediate and heavy financial need with no other reasonable way to cover it. Qualifying reasons typically include medical bills, costs related to buying a primary residence, and payments needed to prevent eviction or foreclosure.

The custodial account structure carries a stricter limit here than some other retirement plans. Hardship distributions from a 403(b)(7) are generally capped at the amount of your own elective deferrals. Earnings on those deferrals and any employer contributions are typically off-limits for hardship purposes. Worth knowing before an emergency, not during one.

Required Minimum Distributions

You can’t leave the money in the account forever. At age 73, the IRS requires annual withdrawals known as required minimum distributions. If you’re still working for the employer that sponsors the plan, and you don’t own 5% or more of the organization, you can delay RMDs until the year you actually retire.⁹

There’s a quirk specific to 403(b) plans. If the plan has separately tracked your pre-1987 balance, those dollars aren’t subject to the age-73 rules; they don’t have to come out until you reach age 75 or retire, whichever is later. If the plan didn’t keep separate records for pre-1987 amounts, the whole balance falls under the standard age-73 schedule.⁹

Missing an RMD is costly. The IRS charges an excise tax of 25% on the amount you should have withdrawn. Catch the mistake and take the missed distribution within two years, and the penalty drops to 10%.⁹

Rolling the Account Over

When you leave the employer, or just want to consolidate accounts, you can move funds from a 403(b)(7) into another eligible retirement plan such as an IRA, a 401(k), or a different 403(b). Done correctly, the money stays tax-deferred.

A direct rollover is the safe path. The custodian sends the funds straight to the receiving plan’s administrator. You never touch the money, nothing is withheld, and there’s no deadline pressure.

An indirect rollover is riskier. The custodian pays the distribution to you and is required to withhold 20% for federal income tax before releasing the check. You then have 60 days to deposit the full original amount, including the withheld 20%, into the new retirement account. Deposit only what you received and the withheld portion is treated as a taxable distribution, which can trigger the 10% early-withdrawal penalty if you’re under 59½. You’ll get the withheld amount back as a credit when you file your return, but in the meantime you have to cover that 20% out of pocket to make the rollover whole.¹⁰

What the Account Costs You

Because the account can only hold mutual funds, the expense ratios on those funds are the main ongoing cost. Index funds in retirement accounts commonly charge between 0.03% and 0.10% of assets annually. Actively managed funds can run from 0.50% to over 1.00%. When looking at your plan’s fund lineup, expense ratio is the single most controllable factor affecting your long-term return.

Some custodians also charge an annual account maintenance fee or per-transaction fees. Those vary by provider and plan. Your employer’s plan documents or the custodian’s fee disclosure will list every charge.

1
Legal Information Institute (LII). 26 USC 403(b)(7)
2
eCFR. 26 CFR 1.403(b)-8 – Funding
3
Internal Revenue Service. Retirement Plans FAQs Regarding 403(b) Tax-Sheltered Annuity Plans
4
Internal Revenue Service. Publication 571 (01/2026), Tax-Sheltered Annuity Plans (403(b) Plans)
5
Internal Revenue Service. Retirement Topics – 403(b) Contribution Limits
6
Internal Revenue Service. 2026 Amounts Relating to Retirement Plans and IRAs, as Adjusted for Changes in Cost-of-Living
7
Internal Revenue Service. 403(b) Plans – Catch-Up Contributions
8
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
9
Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
10
Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions