The Standard 403(b) Plan: Limits, Withdrawals, and Rollovers

A 403(b) plan is a tax-advantaged retirement account offered to employees of public schools, churches, and 501(c)(3) nonprofits, letting you defer part of your salary into investments that grow tax-free until you withdraw them. For 2026, you can put in up to $24,500 of your own pay, with additional catch-up amounts available if you are older or have long service with the same employer.1Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500 The plan works much like a 401(k) but restricts what you can invest in and adds a special catch-up for long-tenured employees.

Who Can Have One

Federal law limits 403(b) sponsorship to three types of employers. The largest group is organizations granted tax-exempt status under Section 501(c)(3) of the Internal Revenue Code, which covers charities, hospitals, religious organizations, and similar nonprofits.2Internal Revenue Service. 403(b) Plan Fix-It Guide – Your Organization Isnt Eligible to Sponsor a 403(b) Plan Public school systems come next, including state universities, community colleges, and K-12 districts operated by a state or local government.3Office of the Law Revision Counsel. 26 USC 403 – Taxation of Employee Annuities Ministers and certain employees of religious organizations make up the third category.

2026 Contribution Limits

The baseline employee deferral limit is $24,500 for 2026.1Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500 When employer contributions like matching or nonelective amounts are counted alongside yours, the combined total added to the account cannot exceed $72,000 or 100% of your compensation, whichever is less.4Internal Revenue Service. COLA Increases for Dollar Limitations on Benefits and Contributions

Three catch-up provisions can raise your personal deferral cap:

  • Age 50 and older. If you turn 50 or older during the calendar year, you can contribute an additional $8,000 above the $24,500 base.1Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
  • Ages 60 through 63. Under SECURE 2.0, participants turning 60, 61, 62, or 63 during the year get an enhanced catch-up of $11,250 for 2026. It replaces the standard age-50 amount rather than stacking on top of it.5Nationwide Retirement Solutions. IRS Contribution Limits
  • 15 years of service. If you have worked for the same qualifying employer for at least 15 years, you may defer an extra $3,000 per year, subject to a $15,000 lifetime cap. The qualifying employers for this provision are public school systems, hospitals, home health service agencies, health and welfare service agencies, and churches.6Internal Revenue Service. Retirement Topics – 403(b) Contribution Limits

The 15-year catch-up can be used alongside either age catch-up, and the plan applies the 15-year amount first. A 50-year-old teacher with 15 years at the same district could therefore defer up to $35,500 in 2026: $24,500 base, plus $3,000 for service, plus $8,000 for age.7Internal Revenue Service. 403(b) Plans – Catch-Up Contributions

What You Can Invest In

Federal law restricts 403(b) money to two vehicle types. Annuity contracts under Section 403(b)(1), sold by insurance companies, offer either a fixed interest rate or variable returns tied to underlying portfolios. Custodial accounts under Section 403(b)(7) hold mutual fund shares only; they cannot hold individual stocks, bonds, or ETFs.8Internal Revenue Service. Section 403(b) Tax-Sheltered Annuity Arrangements Churches have a third option called a retirement income account.

Within either vehicle, you choose between traditional (pre-tax) and Roth (after-tax) contributions. Traditional deferrals reduce your taxable income now and are taxed as ordinary income when you withdraw them later. Roth deferrals go in with money you have already paid taxes on, and qualified withdrawals, including all investment gains, come out entirely tax-free. To be qualified, the account must have been open at least five tax years, and you must be 59½ or older, disabled, or deceased.9Internal Revenue Service. Retirement Plans FAQs on Designated Roth Accounts

Watch the fees inside these vehicles. Annuity contracts often carry mortality and expense charges, surrender fees if you move money before a set period, and rider costs for guaranteed income features. Mutual fund custodial accounts charge expense ratios and sometimes administrative fees. Comparing expense ratios across your plan’s fund lineup is one of the highest-impact steps you can take for long-term returns.

Employer Contributions and Vesting

Money you contribute from your own paycheck is 100% yours immediately. Employer contributions can come with a vesting schedule that determines how much of that money you keep if you leave early. Two structures are common. Cliff vesting means you own nothing until you hit the required service mark, then you own 100% all at once; the IRS caps cliff vesting at three years for most plans. Graded vesting phases ownership in each year, and the IRS caps graded schedules at six years. Employers can vest you faster than either cap. If you are thinking about a job change, check where you stand before you go: leaving one year short of full vesting means giving up employer contributions you cannot recover.

ERISA Coverage Depends on Your Employer

Whether your 403(b) is covered by the Employee Retirement Income Security Act affects the protections you receive. Public school and other government-employer plans are automatically exempt from ERISA’s Title I. Church plans are generally exempt unless they voluntarily elect coverage. Plans at 501(c)(3) nonprofits are typically subject to ERISA unless the plan accepts only employee salary deferrals and the employer stays out of administration. ERISA-covered plans must meet fiduciary duty standards, file an annual Form 5500, and provide a summary plan description. If you work for a public school or church, your plan almost certainly falls outside ERISA, so read your plan document closely to see what safeguards your employer has adopted on its own.

When You Can Take the Money Out

A 403(b) is built to hold money until retirement, and distributions are only permitted when a triggering event occurs:

  • You reach age 59½.
  • You leave your employer.
  • You become totally and permanently disabled.
  • You die (payouts go to your beneficiary).
  • You experience a financial hardship.
  • You are a qualified military reservist called to active duty.

Not every plan allows all of these. Your plan document controls which triggers are available.10Internal Revenue Service. Retirement Plans FAQs Regarding 403(b) Tax-Sheltered Annuity Plans

Required Minimum Distributions

Once you reach a certain age, the IRS requires you to start withdrawing a minimum each year whether you need the money or not. For people born between 1951 and 1959, that age is 73. If you were born in 1960 or later, SECURE 2.0 pushes the starting age to 75.11Congress.gov. Required Minimum Distribution (RMD) Rules for Original Owners Missing an RMD triggers an excise tax of 25% of the amount you should have taken. If you catch and correct the mistake within two years, the penalty drops to 10%. File IRS Form 5329 to report the correction and, if appropriate, request a waiver.12Internal Revenue Service. Retirement Topics – Required Minimum Distributions (RMDs)

Early Withdrawal Penalty and Exceptions

Any distribution taken before age 59½ generally carries a 10% additional tax on top of the regular income tax you owe on the money. A $20,000 early withdrawal in a 22% tax bracket costs you roughly $6,400 between income tax and the penalty, leaving you with less than $14,000.

Federal law waives the 10% penalty in a number of situations, though regular income tax usually still applies:13Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions

  • Separation from service during or after the year you turn 55 (age 50 for public safety employees), for distributions from that employer’s plan.
  • Total and permanent disability.
  • Substantially equal periodic payments over your life expectancy, often called a 72(t) schedule. Once started, you must maintain payments for at least five years or until you reach 59½, whichever is longer.
  • Unreimbursed medical expenses exceeding 7.5% of your adjusted gross income.
  • Qualified birth or adoption, up to $5,000 per child per parent, taken within one year. You can repay the amount to the plan later.
  • Federally declared disaster, up to $22,000 for qualified individuals.
  • Domestic abuse victim, up to $10,000 or 50% of the account, whichever is less.

Loans and Hardship Withdrawals

Many 403(b) plans let you borrow from your own balance instead of taking a taxable distribution. Federal rules cap the loan at the lesser of $50,000 or 50% of your vested balance, with repayment generally within five years through level payments made at least quarterly. Loans used to buy your primary home can stretch beyond five years.14eCFR. 26 CFR 1.72(p)-1 – Loans Treated as Distributions If you leave your job with a loan outstanding, the remaining balance is generally treated as a distribution, triggering taxes and potentially the 10% penalty.

Hardship withdrawals are separate. You do not repay them, and to qualify you must have an immediate and heavy financial need with no other reasonable way to cover it. Six categories qualify automatically under IRS safe-harbor rules:15Internal Revenue Service. Retirement Topics – Hardship Distributions

  • Medical care expenses for you, your spouse, dependents, or beneficiary.
  • Costs to purchase your primary home (not mortgage payments).
  • Tuition and room and board for the next 12 months of post-secondary education.
  • Payments to prevent eviction from or foreclosure on your home.
  • Funeral expenses.
  • Repair costs for damage to your primary residence.

Hardship withdrawals are subject to income tax and, if you are under 59½, the 10% early withdrawal penalty unless another exception applies. Plans are not required to offer them.

Rolling Over a 403(b) When You Change Jobs

When you leave an employer, your 403(b) balance does not have to stay put. You can roll the funds into a new employer’s 401(k) or 403(b) if that plan accepts incoming rollovers, or into a traditional IRA. Roth 403(b) money can roll into a Roth IRA or another plan’s designated Roth account.

A direct rollover, where the money moves from one plan to another without passing through your hands, is the cleanest option. Nothing is withheld and no reporting headaches follow. An indirect rollover, where the plan sends you a check, is riskier. Your old plan must withhold 20% for federal income taxes, and you have 60 days to deposit the full original amount, including the withheld 20% from your own pocket, into the new account. Miss the deadline or fall short, and the difference counts as a taxable distribution with a potential 10% penalty if you are under 59½.

You can also leave the money in your former employer’s plan if the balance is large enough. Many plans force distributions of small balances, so check first.

How Enrollment Works

Under SECURE 2.0, newly established 401(k) and 403(b) plans must automatically enroll eligible employees starting with the 2025 plan year. The default deferral rate must be at least 3% but no more than 10% of pay, with automatic annual increases of 1% until reaching at least 10% (and up to 15%). You can always opt out or choose a different rate. Several employer categories are exempt: plans established before December 29, 2022, government plans, church plans, businesses with 10 or fewer employees, and companies less than three years old.

If your employer’s plan does not auto-enroll you, enrollment involves two documents. The salary reduction agreement tells your employer how much to withhold from each paycheck, either as a flat dollar amount or a percentage of pay. The account application with the investment provider is where you pick the specific funds or annuity options for your contributions. Some employers handle both through a single online portal; others require you to submit the salary reduction agreement to payroll and open the investment account directly with the provider. Deductions typically begin within one or two pay cycles after both are processed. Once the account is active, log in and confirm that the correct amount is going to the investments you chose.