A 403(b) is a workplace retirement plan for employees of public schools, 501(c)(3) nonprofits, and certain clergy, and it works by letting you defer part of each paycheck into an investment account that grows with tax advantages until you take the money out in retirement. For 2026, you can put in up to $24,500 of your own pay, choose whether to contribute pre-tax or Roth dollars, and invest the balance in either an annuity contract or a mutual fund custodial account. The plan resembles a 401(k) in most respects but has its own eligibility rules, investment menu, and a catch-up provision unique to long-tenured employees.
Who Can Have One
Only three categories of employers can offer a 403(b): organizations that are tax-exempt under Section 501(c)(3) of the Internal Revenue Code (hospitals, universities, charities, research institutes), public school systems, and certain members of the clergy.1Internal Revenue Service. IRC 403(b) Tax-Sheltered Annuity Plans Public school eligibility isn’t limited to teachers; administrators, counselors, and support staff who help run day-to-day operations can participate too.2Internal Revenue Service. 403(b) Plan Fix-It Guide – Your Organization Isn’t Eligible to Sponsor a 403(b) Plan
If your employer offers the plan and you’re on the payroll, you’re probably eligible. IRS rules require any employer that lets one employee make salary deferrals to extend the same offer to all eligible employees.1Internal Revenue Service. IRC 403(b) Tax-Sheltered Annuity Plans Your employer cannot pick and choose who gets in.
How Much You Can Contribute
The 2026 limit on employee salary deferrals is $24,500.3Internal Revenue Service. Retirement Topics – Contributions That cap covers your own contributions across every 403(b) and 401(k) you hold. If you’re deferring into a 403(b) at one job and a 401(k) at another, the combined total still cannot exceed $24,500.4Internal Revenue Service. Consequences to a Participant Who Makes Excess Annual Salary Deferrals
Catch-Up Contributions After 50
Workers 50 and older can add more. The standard catch-up for 2026 is $7,500 for participants ages 50 through 59 and 64 and older. The SECURE 2.0 Act, starting in 2025, created a higher catch-up of up to $11,250 for participants who are 60 through 63, if the plan allows it. A 61-year-old whose plan permits the higher amount could defer as much as $35,750 in 2026.
The 15-Year Rule
The 403(b) has one catch-up you won’t find in a 401(k). If you’ve worked at least 15 years for the same qualifying employer, your plan may let you add an extra $3,000 a year above the normal limit, up to a $15,000 lifetime cap. Not every plan includes this option, and the math interacts with the age-based catch-up in complicated ways. Ask your plan administrator whether the extra room is actually available to you.
Employer Contributions
Your employer may match your deferrals or contribute regardless of what you put in. Those dollars don’t count against your $24,500 employee limit, but the combined total (yours plus the employer’s) is capped separately under Section 415(c) at $70,000 or 100% of your compensation for 2026, whichever is less.
Pre-Tax or Roth
When you sign up, you pick how your deferrals are taxed. Traditional contributions come out of your paycheck before income tax, lowering your taxable income for the year, and are then taxed as ordinary income when you withdraw them in retirement. Roth contributions are taxed now at your current rate, but qualified withdrawals in retirement (including all the investment gains) come out tax-free, provided the account has been open at least five tax years and you’re at least 59½.5Internal Revenue Service. Retirement Plans FAQs Regarding 403(b) Tax-Sheltered Annuity Plans
The right choice depends on where you expect your tax bracket to sit in retirement compared with today. Early-career workers in lower brackets often favor Roth, while peak earners tend to prefer the immediate deduction traditional deferrals offer. Splitting between the two is common. Most states that tax income also tax traditional 403(b) withdrawals, though a handful exempt retirement income partially or fully.
What You Can Invest In
Federal law limits 403(b) plans to two types of investment vehicles: annuity contracts issued by insurance companies, and custodial accounts holding mutual funds.6Office of the Law Revision Counsel. 26 U.S. Code 403 – Taxation of Employee Annuities Annuity contracts are the older format and still common in public school plans. Custodial mutual fund accounts look and behave much like a typical 401(k) lineup.
Cost differences between the two can be significant. Annuity contracts often carry mortality and expense charges of 1% or more per year on top of the underlying fund fees. Mutual fund custodial accounts generally cost less, especially if the plan includes low-cost index funds. If both types are on offer, comparing the total annual cost is probably the highest-impact investment decision you’ll make.
Annuity-based accounts also frequently include surrender charges, which are penalties for pulling money out of the contract during a set period, typically six to ten years, with the charge stepping down each year until it hits zero.7Investor.gov. Surrender Charge A contract might charge 7% in year one, 6% in year two, and so on. If you’re thinking about switching vendors, check the surrender schedule first.
Getting to the Money Before Retirement
You don’t have to wait until 59½ to touch the account, but every early-access route has costs.
Plan Loans
If your plan allows loans, you can borrow the lesser of $50,000 or half your vested balance.8Internal Revenue Service. Retirement Topics – Plan Loans Repayment usually runs five years through payroll deductions, with the interest going back into your own account. Loans used to buy a primary residence get a longer window. While the money is out, it isn’t invested. Miss payments and the outstanding balance can turn into a taxable distribution, plus the 10% early-withdrawal penalty if you’re under 59½.
Hardship Withdrawals
Hardship withdrawals aren’t loans. The money doesn’t get repaid, and the plan isn’t required to offer them. To qualify under IRS safe-harbor rules, the withdrawal has to be for one of these specific needs:9Internal Revenue Service. Retirement Topics – Hardship Distributions
- Unreimbursed medical expenses for you, your spouse, dependents, or beneficiary
- Costs of buying a primary residence (not mortgage payments)
- Tuition and related education expenses for the next 12 months of postsecondary school
- Payments needed to prevent eviction from or foreclosure on your principal residence
- Funeral expenses for family members
- Certain expenses to repair damage to your principal residence
Hardship withdrawals are taxed as ordinary income and may also trigger the 10% early-withdrawal penalty.
Other Early-Withdrawal Exceptions
The 10% additional tax on distributions before 59½ has several other escape hatches: total and permanent disability, separation from service during or after the year you turn 55, substantially equal periodic payments taken over your life expectancy, and qualified domestic relations orders in divorce.10Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
Retirement Withdrawals and RMDs
Once you hit 59½, you can take distributions without the 10% penalty, taxed according to whether the money was contributed pre-tax or Roth.
You can’t leave a traditional 403(b) untouched forever. Required minimum distributions have to begin by April 1 of the year after you turn 73 if you were born between 1951 and 1959, or 75 if you were born in 1960 or later. If you’re still working for the employer that sponsors the plan and don’t own more than 5% of the organization, you may be able to delay RMDs until you actually retire.
Skipping an RMD used to trigger a 50% excise tax on the shortfall. The SECURE 2.0 Act cut that to 25%, and to 10% if you fix the miss within the correction window. Still enough to sting.
Rollovers When You Change Jobs
Leaving the employer doesn’t force you to leave the money there. You can roll a 403(b) into a new employer’s 401(k) or 403(b) (if that plan accepts rollovers), or into a traditional IRA. Roth 403(b) funds can roll into a Roth IRA.
Direct rollovers are the safe route: your old plan sends the money straight to the new account, and there’s no tax event. Indirect rollovers put a check in your hand and give you 60 days to redeposit the full amount. Miss the deadline and the whole distribution becomes taxable, with the 10% penalty on top if you’re under 59½. Worse, the old plan has to withhold 20% for taxes when it cuts you the check, so you’d have to make up that 20% out of pocket to roll over the full balance. Direct rollovers sidestep all of it.
Signing Up
Enrollment involves two forms and a vendor choice. Your employer will provide a list of approved vendors, meaning the insurance companies or investment firms that hold the accounts. You then complete a Salary Reduction Agreement with your employer that authorizes how much comes out of each paycheck,1Internal Revenue Service. IRC 403(b) Tax-Sheltered Annuity Plans and an account application with the vendor you chose. You can change or cancel the Salary Reduction Agreement for future pay periods, but not retroactively. Have your Social Security number and beneficiary information (primary and contingent) ready for the vendor form. Deductions usually start within one or two pay cycles.
Check your first pay stub after enrollment to confirm the right amount is being withheld and sent to the right vendor. Catching a payroll error in the first cycle is easy. Finding out months later that contributions went to the wrong fund, or never started at all, is a mess.