The Benefits of a 403(b) Plan

A 403(b) plan is a tax-sheltered retirement plan for people who work for nonprofits, including charities, schools, and qualified religious organizations. The 403(b) plan is comparable to its private-sector counterpart, the 401(k) plan, with important differences.

If you're considering enrolling in a 403(b) plan, check out the benefits below.

Tax-Deductible and Tax-Free

Contributions to a traditional 403(b) plan are deductible on your federal income taxes. The money comes out of your gross salary and goes directly into the 403(b) plan, untaxed.

This cuts down on the income tax you owe for that year based on your top marginal tax rate. For example, if the last $10,000 of your adjusted gross income is taxed in the 22% tax bracket, placing $10,000 into a 403(b) would save you $2,200 in taxes.

If you opt for a traditional 403(b) plan, you don't pay taxes on the money you pay until you begin making withdrawals after you retire.

It's important to note that you won't owe taxes on the investment growth in your account until after you retire. The money will grow tax-free until you begin making withdrawals.

You will be able to change your investment choices without losing much, except for some trading fees. And because the tax efficiency of your mutual funds isn't a concern, you can concentrate your portfolio on investments that offer high returns and low expenses.

The Roth Alternative

Since 2006, participants have also had the ability to choose a Roth rather than a traditional 403(b) plan. If you opt for a Roth, you'll pay the income taxes upfront in the year in which you contribute the money. But you'll owe no taxes on your contribution or the profits it earns when you take the money out after retiring.

A Potential Employer Match

Your employer might make matching contributions to your 403(b). Some employers kick in as much as 50 cents to $1 for every dollar you contribute. Others contribute nothing.

High Contribution and Income Limits

You can set aside up to $23,000 in a 403(b) in 2024 ($22,500 in 2023). Those 50 or older can make an additional catch-up contribution of up to $7,500 in 2023 and 2024.

Notably, some 403(b) plans allow certain individuals with 15 or more years working at the same company to make additional contributions—up to $3,000, depending on the particular plan. Check with IRS Publication 571 for a closer look at the 15-year rule and how to calculate allowable contributions.

The total combined contribution limit for 403(b) plans for both the employee and employer in 2024 is $69,000, or $76,500 with the catch-up contribution. It was $66,000 or $73,500 including catch-up contributions in 2023.

For those who want to participate in a 403(b), your income cannot be more than the annual limit set by the IRS. The annual income limit in 2024 is $345,000 (it was $330,000 in 2023).

An Option for a Loan

Sometimes it's even possible to take out a loan from your account, depending on the rules of your particular 403(b) plan. However, keep in mind that you can trigger heavy IRS penalties for early withdrawal and for missing loan payments.

The Bottom Line

A 403(b) plan is a great retirement plan for individuals working for nonprofit organizations. It operates similarly to a 401(k) plan and comes with many benefits, such as having a Roth option and a potential employer match, as well as a high contribution limit.