403b Defined Contribution Plan: What It Is and How It Works

Are you tasked with safeguarding retirement savings for teachers, nurses, and nonprofit staff? With more than $1.3 trillion invested in 403(b) plans nationwide, these defined contribution accounts are a cornerstone of long-term financial planning for public sector and nonprofit employees. For plan sponsors, mastering the ins and outs of 403(b)s is essential to satisfy ERISA compliance and uphold fiduciary duties; for participants, it provides a tax-advantaged route to secure their future.

In this article, we’ll first define what a 403(b) plan is and clarify who can establish and participate in one. Then we’ll break down how contributions and tax treatments work, examine IRS limits and catch-up provisions, and survey the various plan designs and investment options available. We’ll weigh the advantages and drawbacks, outline critical fiduciary responsibilities, and compare 403(b)s with other retirement vehicles. Finally, you’ll learn about participant rights—from loans and rollovers to withdrawals and distribution strategies in retirement.

Along the way, you’ll discover practical tips, real-world examples, and curated resources to empower both employers and employees in making informed decisions about their 403(b) plans. Let’s begin.

What Is a 403(b) Defined Contribution Plan?

A 403(b) defined contribution plan is a tax-advantaged retirement savings vehicle available to employees of public schools, colleges, hospitals, and certain nonprofit organizations. Under Internal Revenue Code Section 403(b), each participant maintains an individual account funded through payroll deductions and, optionally, employer contributions. The balance grows through investment earnings, and the ultimate retirement benefit depends on how much is contributed plus investment performance.

By structuring retirement savings on a per-account basis, 403(b) plans give employees direct ownership of their contributions and control over investment choices (within plan-approved options). At the same time, these plans provide sponsors a clear framework for meeting fiduciary duties and ERISA compliance.

Definition and Purpose

A 403(b) plan, also known as a Tax-Sheltered Annuity (TSA), is a retirement savings plan offered by public schools and certain tax-exempt organizations. Its core purpose is to help eligible employees set aside a portion of their salary on a pre-tax or after-tax (Roth) basis, reducing current taxable income or generating tax-free withdrawals in retirement.

For example, a public school teacher might elect to defer 6% of her salary each pay period into a 403(b). Those contributions, along with any employer match, accumulate in her individual account for future retirement income. For a concise overview, see What Is a 403(b) Tax-Sheltered Annuity Plan?

Historical Context and Regulatory Basis

The 403(b) arrangement originated in the Revenue Act of 1958 as the “tax-sheltered annuity,” allowing employees of certain nonprofit institutions to defer income into annuity contracts. Over time, Congress expanded the rules to permit mutual fund custodial accounts, broadening investment choices.

Today, the plan is governed by Internal Revenue Code Section 403(b) and detailed IRS guidance. Sponsors and participants refer to the IRS’s IRC 403(b) Tax-Sheltered Annuity Plans for authoritative regulatory language on contributions, distributions, and nondiscrimination requirements.

Account-Based Defined Contribution Structure

Unlike a defined benefit plan, where retirement benefits are determined by a formula and paid by the employer, a defined contribution plan specifies contribution levels but leaves retirement payouts subject to investment performance.

Feature	Defined Contribution (DC)	Defined Benefit (DB)
Benefit Determination	Account balance at retirement	Formula (e.g., years × salary)
Investment Risk	Participant bears risk	Employer bears risk
Funding Responsibility	Employee and employer	Employer
Payout Certainty	Varies with market performance	Guaranteed by employer

In a 403(b) DC plan, participants assume responsibility for how investments perform, making the selection of investment options and ongoing monitoring critical to achieving retirement goals.

Who Can Establish and Who Can Participate in a 403(b) Plan?

Not every employer or employee is entitled to a 403(b). These plans are designed for organizations and workers in the public and nonprofit sectors. Understanding who can sponsor a 403(b) and who can join it is the first step in making sure your plan stays compliant—and that your staff have access to these valuable retirement benefits.

Eligible Employers and Plan Sponsors

Only certain types of organizations may adopt a 403(b) plan. Under IRS rules, plan sponsors typically include:

Public school systems (K–12), state colleges, universities, and other government educational institutions
Nonprofit organizations exempt under Internal Revenue Code Section 501(c)(3), such as hospitals, charities, and foundations
Churches and qualified church-controlled organizations
Ministers, their employees, and certain religious institutions under the 403(b)(9) provision

Before contributions can begin, an employer must adopt a written plan document that outlines eligibility, contribution rules, vesting schedules, and investment options. That document becomes the legal blueprint for everything from enrollment to distributions.

Universal Availability and Exceptions

To prevent discrimination, the IRS enforces a “universal availability” rule: if one employee in a job category is allowed to make elective deferrals, every employee in that same category must be offered the chance. However, plans may exclude:

Employees already participating in another employer-sponsored retirement plan
Nonresident aliens with no U.S. earned income
Part-time workers who normally log fewer than 20 hours per week
Student workers enrolled and attending classes at the sponsoring educational institution

These exceptions help sponsors tailor eligibility without running afoul of nondiscrimination requirements. For a full breakdown of permitted exclusions, see the IRS’s FAQs on 403(b) plans.

Eligible Employees and Participation Requirements

Once an employer adopts a plan and satisfies universal availability rules, individuals must meet their employer’s specific participation criteria. Common requirements include:

Employment classification: Only staff in defined roles or departments as described in the plan document
Service threshold: A common waiting period is 1,000 hours of service within a 12-month period (though some plans have no waiting period)
Age minimum: Plans may require employees to reach age 21 before they can defer salary
Enrollment windows: Many plans offer annual or quarterly open enrollment; some automatically enroll new hires unless they opt out

By combining these criteria with clear communications—employee notices, summary plan descriptions, and timely enrollment deadlines—plan sponsors lay the groundwork for a smooth rollout and proper recordkeeping.

How a 403(b) Plan Operates: Contributions and Tax Treatment

A 403(b) plan’s power lies in its simplicity: contributions are deducted directly from an employee’s paycheck, invested in a personalized account, and allowed to grow with favorable tax treatment. Both employers and employees can make contributions, but the rules around who pays what and when taxes apply differ depending on the type of contribution. Below, we break down how elective deferrals work, how matching and profit-sharing fit in, and why tax deferral or tax-free growth can be such a compelling retirement tool.

Employee Elective Contributions

Employees typically elect a flat dollar amount or a percentage of their salary to flow into their 403(b) account each pay period. For example, an individual might choose to defer 6% of every paycheck. That election remains in effect until the employee changes it—often as simply as updating an online portal or submitting a new salary-deferral form.

Within many plans, participants choose between:

Traditional (pre-tax) contributions, which reduce current taxable income.
Roth (after-tax) contributions, taxed up front but withdrawn tax-free in retirement if holding requirements are met.

Consider a teacher earning $60,000 annually who defers 6% ($3,600) into a traditional 403(b). Her taxable income for the year drops to $56,400 ($60,000 – $3,600 = $56,400). By contrast, a Roth election would leave her taxable income unchanged but allow her contributions and earnings to be withdrawn tax-free, provided she’s at least 59½ and the account has been open for five years.

Employer Contributions and Matching

Many organizations boost retirement savings by contributing alongside employees. Common formulas include:

Employee Contribution	Employer Match	Total Potential Contribution
4% of salary	50% match up to 4%	6% (4% + 2%)
6% of salary	100% match up to 3%	9% (6% + 3%)
Discretionary profit sharing	Varies (e.g., 3% of compensation)	Employee’s deferral + profit share

Beyond fixed matches, some employers make discretionary profit-sharing contributions—a percentage of pay allocated based on organizational results. These additional contributions vest according to the plan’s schedule and count toward the IRS annual additions limit (see next section).

Tax Advantages and Treatment

A 403(b) unlocks two main tax benefits:

Traditional 403(b)
- Contributions lower current taxable income.
- Earnings grow tax-deferred.
- All withdrawals in retirement are taxed as ordinary income.
Roth 403(b)
- Contributions don’t reduce taxable income today.
- Earnings and qualified distributions are tax-free (account must be held at least five years, and withdrawals must occur after age 59½).

Regardless of type, investments inside the plan aren’t taxed year to year, allowing dividends, interest, and capital gains to compound undisturbed. State tax treatment generally follows federal rules, although a few states tax contributions differently. For more on Roth versus traditional tax treatment, see What is a 403(b)?.

If you’d like a broader operational overview, check out MissionSquare’s guide to 403(b) Defined Contribution Plans.

Contribution Limits and Catch-Up Provisions

Each year, the IRS sets limits on how much participants can defer into a 403(b) plan and how much can flow into their account in total. Knowing these figures—and the special catch-up opportunities—helps both sponsors and participants maximize savings without running afoul of the rules. Below, we’ll break down the elective deferral limits for 2024 and 2025, the overall cap on contributions, and two distinct catch-up provisions for those who qualify.

Annual Elective Deferral Limits (2024 and 2025)

Employees may choose to defer a portion of their salary to a 403(b) up to the following limits:

For plan year 2024: $23,000
For plan year 2025: $23,500

These limits apply to the combined total of traditional (pre-tax) and Roth (after-tax) elective deferrals. Because the IRS adjusts these figures for cost-of-living changes, plan sponsors should confirm the latest numbers each autumn.

Total Contribution Limits Including Employer Contributions

Beyond employee deferrals, the IRS also caps the total “annual additions” to a participant’s account—including employer matching, profit-sharing, and other allocations. For most participants, the maximum additions are:

$69,000 for 2024
$70,000 for 2025

Alternatively, contributions cannot exceed 100% of the participant’s includible compensation. For example, if a nurse earns $60,000 in 2024, contributes the full $23,000 elective deferral, and receives a $10,000 employer match, her total additions of $33,000 remain well under the $69,000 ceiling.

Age 50 Catch-Up Contributions

Participants aged 50 or older by the end of the calendar year may make an extra “catch-up” deferral:

Additional $7,500 in both 2024 and 2025

This means a 52-year-old teacher could defer up to $23,000 + $7,500 = $30,500 in 2024 (or $23,500 + $7,500 = $31,000 in 2025). Catch-up contributions must be designated properly in payroll elections and are subject to the same testing and overall additions limits.

15-Year Service Catch-Up Provisions

Long-serving employees of the same 403(b) sponsor may qualify for an additional catch-up based on service:

Eligible after at least 15 years of service
Lifetime additional maximum: $15,000
Annual limit: the lesser of
- $3,000
- $15,000 minus the sum of prior 15-year catch-ups
- $5,000 multiplied by years of service, less prior 15-year catch-ups

For instance, a librarian with 18 years at a nonprofit who has never used this provision could take up to $3,000 extra in 2025. If she had already used $6,000 in past years, her new catch-up ceiling would be min(3,000; 15,000–6,000 = 9,000; (5,000×18)–6,000 = 84,000) = $3,000.

When both age-50 and 15-year service catch-ups apply, the plan must apply the 15-year provision first. However, total deferrals—including regular elections and both catch-ups—can never exceed the overall annual additions limit.

For complete details on 403(b) contribution ceilings and catch-up opportunities, review the IRS’s guide to 403(b) contribution limits.

Types of 403(b) Plans and Investment Vehicles

403(b) plans come in different flavors, but they all share a common goal: helping employees of public schools, nonprofit organizations, and churches build retirement savings. At the highest level, you’ll choose between a traditional or a Roth plan design, and decide which type of investment vehicle—annuity contracts or custodial accounts—best fits your participants’ needs. Below, we break down these options and highlight common subtypes and investment menus you might see in practice.

Traditional vs Roth 403(b) Plans

When you adopt a 403(b) plan, you must decide whether to offer traditional contributions, Roth contributions, or both:

• Traditional 403(b):
– Contributions are made on a pre-tax basis, reducing participants’ current taxable income.
– Earnings grow tax-deferred.
– Withdrawals in retirement are taxed as ordinary income.

• Roth 403(b):
– Contributions are made with after-tax dollars, so there’s no upfront tax deduction.
– Qualified distributions (account held at least five years and participant age ≥ 59½) are tax-free.

Many employers opt for a plan design that permits both election types, giving participants flexibility to manage their current tax bill and future tax liabilities.

Tax-Sheltered Annuity vs Custodial Accounts

Under the hood, 403(b) investments fall into two broad categories:

Tax-Sheltered Annuity Contracts (TSAs)
– Offered by insurance companies as variable annuity products.
– May include death benefits and lifetime income guarantees.
– Often carry surrender charges and mortality-and-expense fees.
Custodial Accounts (Section 403(b)(7))
– Held by a custodian (usually a bank or mutual fund company) in a trust arrangement.
– Invested primarily in mutual funds or collective investment trusts.
– Typically lower in fees and more transparent than annuity contracts.

Participants should weigh the trade-off between insurance guarantees and potentially higher costs in TSAs versus the broader investment line-up and fee savings in custodial accounts. For more on these vehicles, see TIAA’s guide to 403(b) tax-deferred annuities.

Common Investment Options: Annuities, Mutual Funds, and More

Within annuity contracts and custodial accounts, plan sponsors often curate a menu of funds and products that balance risk, cost, and participant choice. Common offerings include:

• Variable Annuity Subaccounts: insurance-wrapped portfolios that blend equities, bonds, and short-term instruments
• Equity Mutual Funds: large-cap, mid-cap, and sector-specific funds for long-term growth
• Fixed Income Funds: government, corporate, and high-yield bond portfolios for income and stability
• Target-Date Funds: one-stop funds that automatically shift asset allocation as the participant approaches retirement
• Stable Value Funds: low-volatility investments that aim to preserve principal while earning a competitive yield

Some plans also permit alternative investments—such as real estate investment trusts (REITs)—but these are less common in the 403(b) context. For a more detailed look at how plans structure these options, review the Government Accountability Office’s report on 403(b) investment options and plan design.

Plan-Specific Variations and Self-Directed Options

Beyond standard annuity and custodial arrangements, certain 403(b) plans offer unique features:

• 403(b)(9) Plans for Ministers:
– Customized rules around clergy compensation and housing allowances.

• Self-Directed Brokerage Windows:
– Allow participants to trade individual stocks, ETFs, and an expanded fund lineup.
– Require additional fiduciary oversight and participant education to manage risk.

• Custom Target-Date or Lifecycle Funds:
– Designed in partnership with asset managers to align with the sponsoring organization’s demographics and risk profile.

When selecting these plan-specific variations, sponsors should consider administrative complexity, investment governance, and participant sophistication. Striking the right balance ensures that employees have meaningful choices without exposing the plan to undue risk or cost.

Benefits and Drawbacks of 403(b) Plans

403(b) plans offer a powerful combination of tax advantages and streamlined savings features, but they can also carry limitations that sponsors and participants need to weigh carefully. Below we outline key benefits, potential downsides, and factors unique to nonprofit and public sector settings.

Advantages: Tax Savings, Employer Match, and Simplicity

One of the biggest draws of a 403(b) is the tax benefit. With traditional contributions, employees reduce their current taxable income, while Roth contributions lock in tax-free growth for qualified distributions. This dual-track approach lets participants tailor their strategy to today’s tax bracket versus future expectations.

Automatic payroll deductions take the guesswork out of saving. Once an employee elects a deferral percentage, contributions flow directly into their account each pay period—no manual transfers required. Many employers sweeten the deal by offering a matching contribution, for example, 50 cents on the dollar up to 6% of salary. That match is essentially free money and can significantly accelerate retirement savings over time.

Other perks include:

Compounding growth: Tax-deferred or tax-free earnings can reinvest without annual taxes, magnifying long-term returns.
Vesting flexibility: Some plans vest employer contributions immediately or over a short schedule, which can be more generous than private-sector plans.
User-friendly administration: Plan providers often handle investment recordkeeping and compliance testing, relieving sponsors of day-to-day complexities.

For a deeper dive into plan mechanics, check out Empower’s overview on Unraveling the 403(b).

Disadvantages: Investment Choice Limits and Potential Fees

While 403(b) plans provide core advantages, they can come with narrower investment menus compared to 401(k)s or IRAs. Many plans focus on insurance-wrapped annuity contracts, which may carry:

Mortality and expense fees plus surrender charges that can eat into returns if participants change investments early.
Limited fund lineups: A smaller selection of mutual funds or no self-directed brokerage window can restrict portfolio customization.
Variable creditor protections: Depending on state law, certain annuity assets may be less shielded in bankruptcy than 401(k) holdings.

Plan sponsors should watch out for administrative costs embedded in recordkeeping, compliance testing, and investment management. Without regular benchmarking, these fees can quietly erode participant balances over time.

Situational Considerations for Non-Profits and Public Sector Employers

Nonprofit and public employers often leverage unique features of 403(b) plans to reward long-service staff. The 15-year service catch-up lets eligible employees defer extra dollars beyond standard limits, a boon for veteran educators or healthcare workers. And shorter vesting schedules can make retirement benefits a stronger retention tool.

However, smaller organizations may struggle with the burden of ERISA compliance, nondiscrimination testing, and fiduciary oversight. Budget constraints can limit the ability to negotiate low fees or offer Roth options. Outsourcing plan administration and investment fiduciary duties to a specialist—such as a 3(16) administrator—can help manage risk and free internal resources.

Ultimately, the value of a 403(b) plan hinges on careful plan design, transparent fee disclosure, and ongoing education so participants fully grasp both the upside and the caveats.

Key Fiduciary Responsibilities Under ERISA for 403(b) Sponsors

Sponsoring a 403(b) plan carries significant responsibilities under the Employee Retirement Income Security Act (ERISA). Fiduciaries aren’t defined by their job titles but by the functions they perform—anyone with discretionary control over plan assets or administration, or anyone giving investment advice for a fee, can be held to ERISA’s standards. Understanding these obligations—and the risks of falling short—is essential for both plan sponsors and committees tasked with overseeing a retirement program.

Identifying Plan Fiduciaries: Who Qualifies and Why It Matters

Under ERISA, a fiduciary is anyone who:

Exercises discretionary authority or control over plan management or assets
Renders investment advice for a fee or other compensation
Has discretionary responsibility for plan administration

This “function-over-title” rule means that even if your organization’s board member or HR director isn’t labeled “fiduciary” in the plan document, they may become one by approving investments, selecting service providers, or interpreting plan terms. Common fiduciary roles include:

Trustees holding legal title to plan assets
ERISA Section 3(16) Plan Administrators handling day-to-day operations
Investment advisers or committees choosing and monitoring the fund lineup

When you onboard a new committee member or delegate duties to a third-party administrator, it’s critical to document who’s responsible for what. That way, each fiduciary knows the scope of their decision-making authority—and the personal liability that comes with it.

Core ERISA Duties: Prudence, Loyalty, Diversification, and Document Compliance

Once you’ve identified the plan fiduciaries, four core duties come into play:

Duty of Loyalty (Exclusive Purpose)
Ensure every decision—investment selection, fee negotiation, or vendor hire—is made solely in participants’ best interests, never to benefit the employer or service provider.
Duty of Prudence
Act with the care, skill, and diligence a prudent expert would exercise. This means conducting regular benchmarks of fees, comparing performance, and documenting the analysis.
Duty to Diversify
Reduce the risk of large losses by offering a mix of asset classes and investment styles. A lineup that bundles equities, bonds, and conservative options helps protect participants through market swings.
Duty to Follow Plan Documents
Operate the plan according to its terms, from eligibility criteria to distribution procedures. If you amend the plan—for example, to add a Roth feature—make sure you update the summary plan description and notify participants promptly.

A simple checklist for plan sponsors:

Review investment performance and fees at least annually
Confirm service agreements align with plan goals and fee benchmarks
Validate that communications, SPDs, and notices reflect any plan amendments
Maintain written records of all fiduciary meetings and decision-making processes

By embedding these practices into your governance routine, you’ll build a clear audit trail and demonstrate a commitment to ERISA’s stringent standards.

Potential Liabilities and Enforcement Risks for Non-Compliance

When a fiduciary duty is breached—whether by imprudent investment choices, failure to diversify, or ignoring plan document rules—ERISA allows participants and the Department of Labor to seek remedies. Potential consequences include:

Restitution: personally reimbursing the plan for losses or improper gains
Civil penalties: fines up to $100 per participant per day for certain reporting failures
Excise taxes: imposed by the IRS for prohibited transactions
Corrective orders: requiring the plan to default into a qualified default investment alternative (QDIA) or take other remedial actions

The U.S. Department of Labor offers a practical guide, Meeting Your Fiduciary Responsibilities, to help sponsors identify risks and establish robust compliance processes. Regularly engaging outside counsel or a 3(16) plan administrator can also insulate your organization from unexpected liabilities—letting you focus on delivering a retirement plan that truly serves your employees.

Selecting and Managing Service Providers and Plan Administration

Choosing the right mix of service providers and setting up a robust administrative framework is vital to keep a 403(b) plan running smoothly—and to satisfy ERISA’s stringent requirements. At a minimum, sponsors work with recordkeepers, third-party administrators (TPAs), custodians, and investment advisers. Understanding each role and establishing clear oversight processes helps you control costs, manage risk, and deliver a better experience for participants.

Roles of TPAs, Recordkeepers, Custodians, and Investment Advisers

A 403(b) plan’s back-office ecosystem typically involves:

Third-Party Administrators (TPAs): Handle nondiscrimination testing, compliance filing, Form 5500 preparation, and plan document updates. TPAs ensure the plan meets IRS and DOL requirements.
Recordkeepers: Maintain individual account records, process contributions and distributions, generate participant statements, and often provide a web portal for enrollments and elections.
Custodians: Hold plan assets in trust or custodial accounts, execute trades, settle investments, and safeguard the underlying securities or annuity contracts.
Investment Advisers or Committees: Select and monitor the fund lineup, establish the target date or default investment options, and review performance and fees in accordance with a documented investment policy.

While TPAs and recordkeepers handle the mechanics of day-to-day administration, custodians secure the assets, and advisers focus on the investment strategy. Regular communication among these vendors—and clarity on each party’s responsibilities—prevents gaps in service and ensures no critical task falls through the cracks.

Importance of an Independent 3(16) Plan Administrator

Under ERISA Section 3(16), anyone exercising discretionary control over plan administration is a fiduciary. Many sponsors find that delegating these duties to an external expert reduces liability, streamlines operations, and frees internal staff to focus on mission-critical work. An independent 3(16) plan administrator can:

Interpret plan terms and ensure consistency in eligibility determinations
Issue participant communications (e.g., summary plan descriptions, fee disclosures) on time
Coordinate with TPAs, recordkeepers, and advisers to resolve participant inquiries and compliance issues

By engaging a specialist, you transfer many administrative burdens—and the risk of inadvertent errors—to a provider whose expertise centers on ERISA compliance. Learn how Admin316 Independent Fiduciary Services can take on these responsibilities and bolster your governance framework.

Best Practices for Oversight and Cost Management

Effective oversight requires both routine checks and occasional deep dives. Consider these actionable steps:

Conduct annual vendor reviews: Evaluate each provider’s performance and service levels against the written agreement.
Benchmark fees and services: Compare recordkeeper and investment fees to industry averages. Document any plan-sponsor negotiations or adjustments.
Issue requests for proposals (RFPs): Every three to five years, solicit competitive bids to ensure you’re getting the best combination of price and capabilities.
Request full fee disclosures: Collect and analyze revenue-sharing, 12b-1 fees, and expenses embedded in annuity contracts or funds.
Monitor service-level agreements (SLAs): Track turnaround times for enrollments, loans, distributions, and error resolutions.
Hold quarterly or semi-annual oversight meetings: Bring together the TPA, recordkeeper, custodian, and adviser to review action items, compliance deadlines, and participant engagement metrics.

By building a disciplined governance rhythm—complete with clear agendas, written minutes, and follow-up on action items—you’ll keep costs in check, catch issues before they escalate, and demonstrate a proactive commitment to fiduciary excellence.

Comparing 403(b) Plans to Other Retirement Savings Options

Retirement savers today have a buffet of options—from employer-sponsored defined contribution (DC) plans to individual accounts like IRAs. While the 403(b) shares many features with sister plans, it has its own blend of eligibility rules, investment menus, and tax treatments. Understanding how it stacks up against 401(k)s, 457(b)s, and IRAs can help sponsors tailor their benefits package and participants optimize their long-term strategy.

Whether you’re evaluating a 403(b) as part of an employee benefits package or mapping out your personal retirement plan, comparing its features side by side ensures you make the most of each vehicle’s strengths and work around any limitations.

403(b) vs 401(k): Key Differences and Similarities

At first glance, 403(b) and 401(k) plans operate similarly: participants defer salary into a tax-advantaged account and choose from a menu of investments. Yet they diverge in sponsor eligibility and investment options:

Feature	403(b)	401(k)
Sponsor Eligibility	Public schools, nonprofits, churches	For-profit companies
Investment Vehicles	Annuity contracts, mutual funds	Mutual funds, ETFs, sometimes brokerage
Roth Option	Common, but not mandatory	Widely available
Nondiscrimination Testing	Universal availability rule	ADP/ACP tests
Creditor Protection	Varies by state and asset type	Consistent ERISA protections

Both plans allow traditional (pre-tax) and Roth deferrals, employer matching, and are governed under ERISA. However, 403(b) sponsors often rely on insurance-wrapped annuities, while 401(k) plans tend to offer broader fund lineups and clearer fee structures. For a full list of retirement plan types, see the Department of Labor’s Types of Retirement Plans.

403(b) vs 457(b): Comparing Public Sector Options

While 403(b)s serve nonprofit and educational employers, 457(b) plans are typically offered by state and local governments and certain tax-exempt organizations. Key contrasts include:

Contribution Limits: Both plans share similar elective deferral caps, but 457(b) participants can use a special end-of-career catch-up that doubles deferrals in the three years before retirement.
Withdrawal Rules: 457(b) funds can often be accessed without the 10% early-withdrawal penalty upon separation, whereas 403(b) plans generally impose that penalty before age 59½ (with limited exceptions).
Employer Contributions: 403(b) plans commonly feature employer matches or profit-sharing; in a 457(b), matching is less prevalent and employer contributions may count toward separate limits.

By combining a 403(b) and a 457(b), public sector employees can turbocharge their savings and tap greater flexibility when they change jobs or face unexpected expenses.

403(b) vs IRA and Roth IRA: Individual Retirement Alternatives

IRAs are universally available to anyone with earned income, but they come with lower contribution limits and different tax nuances:

Annual Limits: IRAs cap contributions at $7,000 ($8,000 if age 50+) for 2025—far below 403(b) and 401(k) caps.
Tax Treatment: Traditional IRAs offer tax-deferred growth; Roth IRAs provide tax-free withdrawals. Unlike Roth 403(b)s, Roth IRAs have no required minimum distributions (RMDs).
Portability: IRAs roll easily between custodians, making them ideal for consolidating retirement assets.
RMD Rules: Traditional IRAs mandate RMDs starting at age 73; Roth IRAs never require distributions, while Roth 403(b)s do.

Participants often use IRAs to fill gaps—maxing out their employer plan first, then contributing to an IRA for additional tax-diversification and investment choice.

Using Multiple Plans Together for Maximum Savings

One of the smartest strategies for savers is layering different retirement vehicles. Here’s how to make the most of multiple accounts:

Maximize Employer Match: Prioritize deferrals to your 403(b) up to the full match, then consider a Roth or traditional IRA.
Diversify Tax Treatment: Combine traditional and Roth contributions across 403(b)s, IRAs, and 401(k)s to hedge future tax rate uncertainty.
Leverage Catch-Up Opportunities: If you’re over 50 or have long service in a 403(b), take advantage of both catch-up provisions after funding your IRA.
Mind the Total Additions Limit: Remember that employer and employee contributions across DC plans are capped at $70,000 for 2025.

For an overview of defined contribution plan features and best practices, explore BlackRock’s What Is a Defined Contribution Plan?.

Participant Access: Withdrawals, Loans, Rollovers, and Distributions

Participants often need to tap into their 403(b) accounts before retirement—for emergencies, career changes, or unexpected life events. While these plans prioritize long-term savings, they offer structured methods for accessing funds under certain circumstances. Below we cover four primary pathways: hardship withdrawals, participant loans, rollovers, and final distributions.

Hardship Withdrawals and Early Withdrawal Penalties

Hardship withdrawals allow participants to address immediate and heavy financial needs. Typical qualifying events include:

Unreimbursed medical or dental expenses
Costs to prevent eviction or foreclosure on a primary residence
Funeral or burial expenses for a family member
Repairs after a natural disaster damages a primary home

To request a hardship distribution, participants must certify the necessity and demonstrate that the amount does not exceed the need. These withdrawals are taxed as ordinary income and generally incur a 10% penalty if taken before age 59½. Exceptions to the penalty can apply for disability, substantially equal periodic payments, or separation from service after age 55. Because hardship withdrawals permanently reduce retirement balances and forgo future tax-advantaged growth, participants should consider all alternatives before proceeding.

Participant Loans: Eligibility, Limits, and Repayment Rules

Many 403(b) plans permit loans against a participant’s vested balance, offering a way to borrow without triggering a taxable event—provided the loan is repaid on schedule. Common plan provisions include:

Maximum loan amount: the lesser of $50,000 or 50% of vested account balance
Minimum loan amount: often set at $1,000
Repayment term: usually up to five years, with quarterly or more frequent installments
Interest rate: typically tied to the prime rate plus a fixed margin

Loan repayments—including interest—are paid back into the participant’s own account. If employment terminates before full repayment, the outstanding balance may be treated as a distribution, subject to ordinary income tax and a possible 10% early-withdrawal penalty. Before taking a loan, participants should weigh the immediate cash need against the risk of reduced retirement savings and potential tax consequences.

Rollovers When Changing Jobs: Options and Tax Implications

When moving to a new employer or consolidating retirement accounts, participants can roll over 403(b) assets to preserve tax advantages. Common rollover paths include:

Direct rollover to a new employer’s qualified plan (if permitted)
Direct rollover to a traditional IRA or a Roth IRA
Indirect rollover, where the distribution is paid to the participant, who then has 60 days to redeposit it into an eligible account

A direct rollover avoids mandatory withholding and keeps funds tax-deferred. Indirect rollovers face a 20% federal withholding requirement; participants must replace the withheld amount from other sources to move the entire balance and avoid taxes and penalties. Converting pre-tax funds to a Roth account triggers income taxes in the year of conversion but sets up future tax-free growth. Participants should review plan rules and consult a tax advisor to choose the most effective rollover strategy.

Taxation of Distributions: Pre-Tax vs Roth and State Considerations

Final distributions from a 403(b) are taxed according to the contribution type and state regulations:

Traditional (pre-tax) contributions and their earnings are taxed as ordinary income on distribution.
Qualified Roth distributions—those taken after age 59½ and at least five years after the first Roth contribution—are federal tax-free.
State tax treatment may mirror federal rules or vary in how they treat Roth earnings.

Participants must also satisfy required minimum distributions (RMDs) beginning at age 73 (or later if still employed under certain conditions). Strategically sequencing withdrawals—such as drawing from taxable balances before a Roth account—can help manage overall tax liability in retirement. Engaging a financial or tax professional ensures distributions comply with both federal and state rules and align with individual retirement income goals.

Planning for Retirement: 403(b) Distributions and Required Minimum Distributions

As you approach retirement, deciding how to draw income from your 403(b) is just as important as how you saved. The distribution strategy you choose can affect your cash flow, taxes, and the longevity of your nest egg. Below, we explore common distribution options, explain required minimum distributions (RMDs), and share tax-management tips to help you craft a sustainable retirement income plan.

Distribution Options: Lump-Sum, Annuity, and Systematic Withdrawal

When you’re ready to tap your 403(b), most plans offer three primary distribution paths:

Lump-Sum Distribution
• You receive your entire account balance in one payment.
• Pros: Full control over the funds, flexibility to invest or pay down debt.
• Cons: Big tax hit in the year you withdraw; risk of spending down principal too quickly.
Example: Jane retires at 65, takes a $300,000 lump sum, rolls $250,000 into an IRA, and uses $50,000 to pay off a mortgage.
Annuity Payout
• You purchase an annuity that guarantees income—either for life or a fixed term.
• Pros: Steady, predictable checks; insurance backing.
• Cons: Fees can be high, and you may forfeit leftover principal if you pass away early (unless you add survivor benefits).
Example: Carlos opts for a 20-year certain annuity on a $200,000 balance, securing $1,200 monthly for two decades.
Systematic Withdrawal Plan
• You schedule regular withdrawals—monthly, quarterly, or annually—while the rest of your balance stays invested.
• Pros: Balances predictability and growth potential; you can adjust withdrawals if markets shift.
• Cons: Market downturns can erode your remaining balance; requires ongoing monitoring.
Example: Priya sets up a 4% annual withdrawal on her $500,000 portfolio, generating $20,000 in year one, then recalculating each January.

Required Minimum Distributions (RMDs) for 403(b) Plans

The IRS mandates that once you reach age 73, you begin taking RMDs from your traditional 403(b). The calculation uses your account balance as of December 31 and a life expectancy factor from IRS tables. Key points:

If you’re still working for the plan sponsor beyond age 73, you may delay RMDs from that particular 403(b) until you retire.
Failure to withdraw the RMD on time can trigger a penalty equal to 25% of the undistributed amount (reduced to 10% if corrected within two years).
RMDs apply to pre-tax balances; Roth 403(b) assets are not subject to RMD rules.

Staying on top of RMD timing and calculations ensures you meet IRS requirements and avoid steep penalties.

Tax Considerations in Retirement: Managing Withdrawals for Income

Your withdrawal sequence and account mix can make a big difference in lifetime taxes. Consider these strategies:

Tax Bracket Management: Pull from taxable sources first (e.g., pre-tax 403(b)), then Roth or after-tax accounts in years you expect higher income.
Roth Conversions: In lower-income years, convert a portion of your traditional balance to a Roth IRA to lock in tax-free growth and reduce future RMDs.
Bucket Approach: Divide assets into “buckets” based on time horizon—cash for near-term needs, bonds for medium-term, and equities for growth—then layer distributions accordingly.

Before finalizing any distribution plan, consult a tax professional or financial advisor. They can model scenarios, factor in Social Security timing, and help you align your 403(b) strategy with overall retirement objectives.

Bringing It All Together

We’ve covered the essentials of a 403(b) defined contribution plan: its role as a tax-advantaged retirement vehicle, who can sponsor and participate, how contributions (traditional and Roth) flow in, and the IRS limits and catch-up provisions that cap savings. You’ve seen the variety of plan designs—from annuity contracts to custodial accounts—and weighed their benefits and drawbacks in a nonprofit or public-sector setting.

Fiduciary duties under ERISA demand ongoing prudence, loyalty, diversification, and strict adherence to plan documents. That means choosing the right mix of service providers—TPAs, recordkeepers, custodians, and investment advisers—and, if appropriate, delegating day-to-day administration to an independent 3(16) fiduciary. Regular oversight, fee benchmarking, and clear documentation aren’t just best practices—they’re your first line of defense against compliance risk.

From an employee’s perspective, understanding how to access funds—via loans, hardship withdrawals, rollovers, or retirement distributions—can safeguard against costly mistakes. Likewise, knowing when and how to take required minimum distributions, or sequencing withdrawals across traditional and Roth balances, makes a big difference in your lifetime tax bill.

At its core, a successful 403(b) plan hinges on two pillars:

Robust fiduciary oversight that keeps the plan compliant, transparent, and cost-effective
Empowered participants who make informed elections, monitor their investments, and plan distributions thoughtfully

Admin316 is here to help you uphold those pillars. Whether you need ERISA Section 3(16) administration, independent fiduciary management, or strategic guidance on plan design, our team has the expertise to lighten your compliance burden and strengthen your retirement program. Visit Admin316 to learn how we can partner with you.