Is a 403(b) Plan Worth It for Retirement?

Saving for retirement is a significant financial goal for many individuals. Among the options, a 403(b) plan is a valuable tool for those working in specific sectors. This article explores its structure, benefits, and practical aspects to help individuals assess its potential value for their retirement savings.

Defining a 403(b) Plan

A 403(b) plan is a retirement savings program for employees of public schools, certain tax-exempt organizations, and religious institutions. Often called Tax-Sheltered Annuities (TSAs), its purpose is to provide eligible individuals with a tax-advantaged way to accumulate wealth.

This plan type is similar to a 401(k) plan, as both are employer-sponsored and offer tax benefits. However, 403(b)s are offered by specific employers, including organizations classified under Internal Revenue Code Section 501(c)(3), such as hospitals, charities, and research institutions, as well as public education systems and churches.

Participation in a 403(b) plan is generally extended to all employees of an eligible organization under the “universal availability rule,” with limited exceptions. This rule ensures that if an employer permits one employee to make salary deferral contributions, the offer must be extended broadly across the workforce.

Contribution Rules and Tax Treatment

Contributions to a 403(b) plan can originate from both the employee and, in many cases, the employer. Employees typically contribute through salary deferrals, which can be made on either a pre-tax or Roth (after-tax) basis. Pre-tax contributions reduce current taxable income, and earnings grow tax-deferred until retirement.

Roth 403(b) contributions do not provide an immediate tax deduction, but qualified withdrawals in retirement, including earnings, are entirely tax-free. The choice between pre-tax and Roth depends on an individual’s current and projected future tax situation.

For 2025, the employee elective deferral limit for a 403(b) is $23,500. Individuals aged 50 and older are eligible for an additional catch-up contribution of $7,500, increasing their limit to $31,000. Under the SECURE 2.0 Act of 2022, participants aged 60 to 63 may contribute an enhanced catch-up amount of up to $11,250 in 2025, if the plan permits. The total combined contributions from both employee and employer cannot exceed $70,000 for 2025, or 100% of the employee’s includible compensation, whichever is less.

Withdrawals from a 403(b) are permitted without penalty once the account holder reaches age 59½. Distributions taken before this age generally incur a 10% early withdrawal penalty from the IRS, in addition to regular income taxes on the taxable portion. Exceptions exist for penalty-free early withdrawals, such as for disability or specific medical expenses.

Upon reaching age 73, participants in traditional 403(b) plans are subject to Required Minimum Distributions (RMDs). These are annual withdrawals that must be taken from the account to avoid penalties. Roth 403(b) accounts are not subject to RMDs for the original owner during their lifetime.

Investment Vehicles and Fees

Within a 403(b) plan, the investment options are chosen by the employer, though participants decide which specific options to utilize. Historically, 403(b) plans were primarily structured around annuity contracts. Today, many plans also offer mutual funds, providing participants with a broader range of investment choices.

Annuity contracts are agreements with an insurance company that may offer guaranteed payments. Mutual funds pool money from many investors to invest in a diversified portfolio of stocks, bonds, or other securities. The availability and variety of these options can differ significantly between plans.

All investment vehicles and plan administration incur various fees that can impact the overall growth of retirement savings. Common fees include administrative fees, which cover recordkeeping, compliance, and participant services. These might be charged as a flat annual fee or a percentage of assets.

Investment fees, such as expense ratios for mutual funds, are a percentage of invested assets paid annually to manage the fund, typically ranging from 0.01% to over 2%. Annuities may also have mortality and expense fees, which can add 1% or more annually, along with potential surrender charges if funds are withdrawn or transferred before a specified period, often 5 to 10 years. These fees directly reduce investment returns over time, making it important to review and compare them.

Key Considerations for Participation

When evaluating whether to participate in a 403(b) plan, securing any available employer matching contributions is a primary consideration. An employer match represents additional funds contributed to an employee’s account, often based on a percentage of the employee’s own contributions, which can significantly boost retirement savings. Failing to contribute enough to receive the full match means leaving valuable compensation on the table.

Beyond the employer match, assess the quality of the plan’s investment options and the competitiveness of its fees. High fees can erode investment returns over decades, diminishing the ultimate retirement nest egg.

Individuals should also consider how a 403(b) plan integrates with their broader financial and retirement strategy. If other retirement savings vehicles, such as an Individual Retirement Account (IRA) or a 401(k) from a previous employer, are available, comparing their features, investment options, and fee structures can help optimize overall savings.