The 403(b) for schools and nonprofits

How it works

A worker sends part of each paycheck into the plan before tax, or into a Roth side where the employer offers one, and the yearly cap is the same this year's official 401k elective deferral limit (not yet verified here; see the official source below) that applies to a 401(k). Some 403(b) plans hold mutual funds and others hold annuity contracts sold by insurance companies, and the costs of the two can differ a great deal. A worker with fifteen or more years at the same qualifying employer may be allowed an extra deferral under a special rule, where the plan permits it and under the conditions the IRS lists. Employer contributions, where offered, may vest over time. Withdrawals are taxed as ordinary income, and withdrawals before 59 and a half usually carry the 10 percent (2025, verified on the official page) percent addition unless an exception applies.

What it gives

Deferrals lower this year's taxable income, and growth is not taxed inside the plan.

Teachers and nonprofit workers often have access to both a 403(b) and a 457(b), each with its own cap.

Many school district plans allow a worker to choose among several vendors rather than one.

What it costs, or where the catch is

Annuity based 403(b) products can carry surrender charges and yearly costs well above an index fund.

Some school districts offer dozens of vendors with little guidance, which leaves the comparison to the worker.

The fifteen year rule has a lifetime cap and a formula that is easy to misapply.

A worked example

Ingrid teaches high school and earns $58,000. She defers $400 a month to her 403(b), which is $4,800 a year, and her taxable wages fall to $53,200. One vendor on her district's list charges 1.9 percent a year and another charges 0.2 percent. On a balance of $50,000 that difference is $950 versus $100 in yearly cost, a gap of $850 every year.

Where it goes wrong

The usual miss is signing up with the first vendor who visits the teachers' lounge, without comparing the yearly cost against the other vendors on the district list.

Who confirms it for you

For your own numbers, the plan administrator or HR. This page explains how the rule works for people in general; it does not know your situation and does not tell you what to do.

The official source

IRS: 403(b) tax sheltered annuity plans. Every figure that changes by year comes from the site's rules table, which the watcher checks against the official page on a schedule; where a figure is not yet verified, this page says so instead of printing a number.