403(b)

A 403(b) is a tax-advantaged retirement savings plan offered by certain employers, including public schools, nonprofit organizations, and some hospitals. It works similarly to a 401(k) plan but is designed specifically for employees of these types of organizations. Contributions are typically made with pre-tax dollars, which lowers your taxable income for the year. The money in the account grows tax-deferred, meaning you do not pay taxes on investment gains until you withdraw the funds in retirement.

Some employers also offer a Roth 403(b) option, where contributions are made with after-tax dollars. In that case, qualified withdrawals in retirement are tax-free.

2026 Contribution Limits:

• The standard employee contribution limit is $23,500 per year.
• Workers age 50 or older can make an additional catch-up contribution of $7,500, bringing their total to $31,000.
• Workers ages 60 to 63 qualify for an enhanced catch-up contribution of $11,250 instead, for a total of $34,750.
• Some employees with 15 or more years of service with the same eligible employer may qualify for an extra $3,000 annual catch-up, subject to IRS rules.

Practical Example: A public school teacher earns $55,000 per year and contributes $10,000 to her 403(b). Her taxable income for the year is reduced to $45,000. Her contributions grow over time, and she pays income tax only when she begins taking distributions, typically in retirement when she may be in a lower tax bracket.

Investments inside a 403(b) are often limited to annuity contracts or mutual funds, depending on the plan provider. It is worth reviewing the investment options and any associated fees before choosing where to direct contributions.

Early withdrawals taken before age 59½ are generally subject to a 10% penalty plus ordinary income taxes, with some exceptions for qualifying hardships or life events.

RetireGrader is not a financial advisor or fiduciary. This definition is for educational purposes only.