How Does a 403b Work?
Jason Stolz CLTC, CRPC
Many of our customers ask us “How Does a 403b Work?” A 403(b) plan is a retirement savings program for employees of public schools, universities, hospitals, and nonprofit organizations. Similar to a 401(k), it allows you to make pre-tax or Roth contributions that grow tax-deferred—or tax-free in the case of Roth 403(b)—until withdrawn in retirement.
Understanding how a 403b works is key to maximizing your benefits and avoiding common mistakes. From contribution limits and employer matches to rollover rules and annuity options, this guide will help you make the most of your plan and secure lifelong income in retirement.
Convert Your 403(b) to Lifetime Income
Learn how to roll your 403(b) into an annuity for guaranteed income, tax advantages, and protection from market volatility.
403(b) Plan Basics: Eligibility, Contributions, and Tax Treatment
- Eligibility: Available to employees of public schools, certain tax-exempt 501(c)(3) organizations, and ministers.
- Contributions: Participants can contribute up to $23,000 in 2025, with an additional $7,500 catch-up contribution for those age 50 or older.
- Employer matching: Many employers offer partial or full matching, boosting retirement savings faster.
- Tax advantages: Traditional 403(b) contributions are pre-tax, lowering taxable income now; Roth 403(b) contributions grow tax-free if qualified.
- Withdrawals: Distributions are typically taxed as ordinary income and may be subject to a 10% early withdrawal penalty before age 59½.
403(b) vs. 401(k) vs. IRA: What’s the Difference?
While all three plans share similar tax advantages, their rules, investment options, and eligibility differ. Here’s how the 403(b) stacks up:
| Feature | 403(b) | 401(k) | IRA |
|---|---|---|---|
| Eligibility | Public schools & nonprofits | Private-sector employers | Individuals |
| Contribution Limit (2025) | $23,000 | $23,000 | $7,000 |
| Employer Match | Common but optional | Common | None |
| Investment Options | Mutual funds, annuities | Mutual funds, ETFs | Wide variety |
| Typical Fees | Low to moderate | Low to moderate | Varies by custodian |
| Rollover Options | To IRA or annuity | To IRA or new plan | To another IRA |
Estimate Lifetime Income from Your 403(b)
Rolling Over a 403(b) to an IRA or Annuity
When you change jobs or retire, your 403(b) funds can be rolled directly into an IRA or annuity to continue tax deferral and expand your investment options. Direct rollovers avoid penalties and keep your money working for you.
- Direct Rollover: Moves funds directly between custodians—no taxes or penalties.
- Indirect Rollover: You receive the funds and must redeposit them within 60 days to avoid taxation.
- Rollover to Annuity: Converts savings into a guaranteed lifetime income stream with optional spousal and death benefit riders.
Why Many 403(b) Holders Choose Annuities
Because 403(b) plans are often linked to insurance companies, many participants transition to annuities naturally at retirement. This allows them to lock in guaranteed income and avoid outliving their savings.
- Tax-deferred growth: Both 403(b) and annuities offer compounding without annual taxes.
- Lifetime income: Annuities can turn a portion of your balance into permanent income.
- Principal protection: Fixed and fixed indexed annuities safeguard against market downturns.
- Flexible access: Most include free-withdrawal provisions for emergencies.
Compare 403(b) Rollover Options
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