How to Open a 403(b) Account: Steps, Requirements, and Options

Saving for retirement is important, especially for employees of public schools, non-profits, and certain religious organizations who have access to a 403(b) plan. This tax-advantaged account allows individuals to invest pre-tax or after-tax income, helping them grow their savings while potentially lowering their taxable income.

Setting up a 403(b) involves selecting a provider, understanding contribution limits, and gathering necessary documentation. Navigating these steps effectively ensures employees maximize their retirement benefits.

Eligibility Requirements

A 403(b) plan is available to employees of public schools, tax-exempt 501(c)(3) nonprofits, and church-related institutions. Eligible participants include teachers, school administrators, professors at public universities, hospital employees, and staff members of charitable organizations. Independent contractors generally do not qualify unless they provide services under specific conditions set by an eligible employer.

Employers must also meet eligibility criteria. Public school districts must be operated by a state or local government, while nonprofits must maintain tax-exempt status under IRS regulations. Religious organizations have additional flexibility under the “church plan” exemption, allowing them to structure their 403(b) offerings differently.

Some employees may face restrictions based on job classification. Part-time workers, adjunct faculty, and temporary employees might not be automatically eligible unless they meet minimum service requirements, such as working at least 1,000 hours in a year. Employers can impose waiting periods before new hires can contribute but cannot exclude employees based on age or salary.

Plan Providers

Choosing a plan provider affects investment options, fees, and account management services. Unlike 401(k) plans, which typically have a single provider selected by the employer, 403(b) plans often allow employees to choose from multiple approved vendors. Careful comparison helps find the best fit.

Providers fall into two categories: insurance companies and mutual fund providers. Insurance companies offer annuity-based plans, including fixed and variable annuities. Fixed annuities provide guaranteed returns, while variable annuities offer market-based growth with the option to convert savings into a lifetime income stream. Mutual fund providers offer custodial accounts with a range of funds, often with lower fees and greater flexibility than annuities.

Fees significantly impact long-term investment growth. Annuity-based plans often have higher costs due to mortality and expense risk charges, while mutual fund-based plans typically have lower fees but still include fund management expenses. Some providers charge annual maintenance fees, which can reduce returns over time. Comparing expense ratios, administrative costs, and surrender charges ensures more contributions go toward investment growth.

Investment choices vary widely. Some providers offer a broad selection of low-cost index funds, actively managed funds, and target-date funds, while others have a more limited menu. Target-date funds, which adjust asset allocation based on an investor’s expected retirement date, are a popular option for those who prefer a hands-off approach. A well-diversified portfolio helps manage risk and optimize returns.

Types of 403(b) Plans

A 403(b) plan can be structured in different ways, affecting how contributions are taxed and how withdrawals are treated in retirement. The two primary types are Traditional and Roth, each offering distinct tax advantages. Some employers may also provide annuities or self-directed accounts, which impact investment choices and fees.

Traditional

A Traditional 403(b) allows employees to contribute pre-tax income, reducing their taxable earnings for the year. For example, if someone earns $50,000 and contributes $5,000, their taxable income drops to $45,000, potentially lowering their tax liability. Withdrawals are taxed as ordinary income in retirement, and distributions must begin by April 1 of the year after turning 73, per the SECURE 2.0 Act of 2022.

Early withdrawals before age 59½ generally incur a 10% penalty in addition to regular income tax, though exceptions exist for hardships, medical expenses exceeding 7.5% of adjusted gross income, and certain qualified public safety employees. Employer contributions, if offered, follow the same tax treatment. Traditional 403(b) plans benefit individuals who expect to be in a lower tax bracket in retirement, as they defer taxes until later years when their income may be lower.

Roth

A Roth 403(b) differs from the Traditional version in that contributions are made with after-tax dollars, meaning they do not reduce taxable income in the year they are made. However, qualified withdrawals—including both contributions and investment earnings—are entirely tax-free if the account has been open for at least five years and the account holder is at least 59½. This can be beneficial for individuals who anticipate being in a higher tax bracket in retirement or who want to avoid required minimum distributions (RMDs), which were eliminated for Roth 403(b) accounts starting in 2024 under SECURE 2.0.

Unlike Traditional 403(b) plans, Roth contributions do not provide an immediate tax deduction but offer long-term tax savings. For example, if an individual contributes $6,000 annually for 30 years and earns an average 7% return, their account could grow to approximately $606,000. In a Roth 403(b), this entire amount could be withdrawn tax-free, whereas in a Traditional 403(b), taxes would be owed on the full balance.

Other Options

Some employers offer annuity-based 403(b) plans or self-directed brokerage accounts. Annuities, provided by insurance companies, can be either fixed, offering a guaranteed return, or variable, where returns depend on market performance. While annuities provide income security, they often come with higher fees, surrender charges, and complex payout structures.

Self-directed brokerage accounts within a 403(b) allow participants to invest in a wider range of assets, including individual stocks, bonds, and exchange-traded funds (ETFs), rather than being limited to a preselected menu of mutual funds. These accounts offer greater flexibility but require more active management and carry higher risk. Some employers also provide after-tax contribution options, allowing employees to contribute beyond the standard IRS limits, though these contributions do not receive the same tax advantages as Traditional or Roth contributions.

Steps to Open the Account

The first step in setting up a 403(b) is confirming whether the employer offers a plan and identifying the enrollment process. Unlike IRAs, which individuals can open independently, 403(b) plans must be established through an employer-sponsored program. Some organizations require employees to complete an enrollment form, while others use online platforms for contributions and investment selections.

Once access to the plan is confirmed, selecting appropriate investments is essential. While some plans offer default investment options, such as target-date funds, others require active selection from an approved fund lineup. Reviewing fund prospectuses, analyzing historical performance, and comparing expense ratios help in making informed decisions. Some plans also provide risk assessment tools to guide employees in choosing allocations that align with their long-term financial goals.

After investment selections are made, contribution amounts must be established. Many plans allow employees to specify either a percentage of salary or a fixed dollar amount per pay period. Since contributions are deducted automatically, ensuring the selected amount aligns with overall budgeting plans is important. Some employers offer automatic escalation features, which gradually increase contributions over time—an option worth considering for those looking to maximize savings without immediate financial strain.

Contribution Limits

The IRS sets annual contribution limits for 403(b) plans. For 2024, the elective deferral limit is $23,000, meaning employees can contribute up to this amount on a pre-tax or Roth basis. Those aged 50 or older can make an additional catch-up contribution of $7,500, bringing their total allowable contribution to $30,500. These limits are periodically adjusted for inflation.

In addition to elective deferrals, some employers offer matching or discretionary contributions, which do not count toward the employee’s individual limit but are subject to a separate overall cap. The total combined contribution limit—including both employee and employer contributions—is $69,000 in 2024, or $76,500 for those eligible for catch-up contributions. Employees with at least 15 years of service at the same qualifying employer may also qualify for an additional catch-up contribution of up to $3,000 per year, with a lifetime maximum of $15,000, though this benefit has specific eligibility criteria.

Documentation Needed

Opening a 403(b) account requires submitting specific documents to the employer or plan provider. Employees typically need to provide a completed enrollment form, which includes personal information, beneficiary designations, and investment selections. Some employers require additional paperwork, such as salary reduction agreements, which authorize payroll deductions for contributions.

Identification documents, such as a Social Security number and government-issued ID, are generally required. If rolling over funds from another retirement plan, employees may need to complete a rollover request form and provide account details from the previous provider. Employers may also request proof of employment, especially for those qualifying for special contribution provisions like the 15-year catch-up. Keeping copies of all submitted documents ensures employees have records for future reference.