403(b) Plans Explained: How the Teacher and Nonprofit Plan Differs From a 401(k)

A 403(b) is the workplace retirement plan offered by public schools, 501(c)(3) nonprofits, and churches, and it works almost exactly like a 401(k) with one important exception: the investments it can hold. Contributions come out of your paycheck pre-tax or as Roth, the money grows tax-deferred, the 2026 employee limit is the same $24,500, and the same age rules apply on the way out. But where a 401(k) can hold almost anything, a 403(b) is limited to annuity contracts and mutual funds, and that single difference explains most of what makes these plans confusing.

I paid into a 403(b) for most of a thirty-year teaching career in Ohio, and for a long time I could not have told you what was in it. The person who signed me up in the faculty lounge was a vendor’s representative, not anyone from the district, the statements arrived from a company I had never heard of, and the district did not seem to have much to do with the account at all. It took me most of the year I spent untangling my accounts before retiring to understand why. Here is the plain version.

What a 403(b) is and who gets one

A 403(b) is a tax-advantaged retirement plan available only to employees of public schools, tax-exempt 501(c)(3) organizations (hospitals, universities, charities), and certain churches and ministers¹. The name is a section of the tax code, just like the 401(k), and the account was originally called a tax-sheltered annuity, which tells you a lot about its history.

Congress created it in 1958 for teachers, and at first it could only hold annuity contracts sold by insurance companies. Mutual funds through a custodial account were added in 1974. That origin story is why so many school 403(b)s still look like insurance products rather than investment accounts, while a hospital or university plan run by a single recordkeeper looks a lot more like a modern 401(k).

Public employees in state and local government generally get a 457(b) instead, and federal employees get the Thrift Savings Plan. But public schools sit in a strange overlap: many districts offer both a 403(b) and a 457(b), which becomes useful later. The overview of how all these plans sit together is in the site’s guide to the main types of retirement accounts.

Contribution limits: the same numbers as a 401(k)

For 2026 you can contribute up to $24,500 to a 403(b), plus a catch-up of $8,000 from age 50 for a total of $32,500, and a larger catch-up of $11,250 (instead of $8,000) at ages 60 to 63². These are identical to the 401(k) figures, and the full breakdown, including IRA limits, is in retirement contribution limits.

The 403(b) then adds a catch-up the 401(k) does not have. Employees with 15 or more years of service at the same qualifying employer may contribute up to an extra $3,000 a year, capped at $15,000 over a lifetime, provided their past contributions averaged less than $5,000 a year¹. It was written for exactly the person I was: a long-serving teacher who had underfunded the account for years. The catch is that not every plan offers it, and when both the age 50 and the 15-year catch-ups apply, the IRS counts contributions against the 15-year one first. It is worth asking for, and worth having a tax professional check.

Contributions can be pre-tax (traditional) or Roth if the plan allows a Roth 403(b), and the trade-off is the same traditional versus Roth decision as everywhere else: a tax break now, or tax-free withdrawals later.

The employer match, and why teachers often do not get one

Most public school 403(b)s have no employer match at all, because the district’s retirement contribution goes into the state teacher pension system instead³. That is not a flaw so much as a different structure: the pension is the employer’s piece, and the 403(b) is entirely yours to fund or ignore.

Nonprofit employers are a different story. Hospitals, universities, and larger charities frequently contribute a percentage of salary or match employee contributions, sometimes generously, and a 403(b) with employer money in it is usually covered by ERISA, the federal pension law. ERISA brings vesting schedules (you may have to stay a few years to keep the employer’s contributions), annual fee disclosures, and a legal duty on the plan sponsor to act in your interest.

Public school and church plans are generally exempt from ERISA. In practice that means nobody at the district is legally required to pick good funds for you or to police what the vendors charge. That responsibility, uncomfortably, is yours.

The investment menu: annuities, mutual funds, and nothing else

A 403(b) can hold only two kinds of investment: annuity contracts from an insurance company, or mutual funds held in a custodial account⁴. No individual stocks, no exchange-traded funds held directly, and no self-directed brokerage window of the kind some 401(k)s offer.

Within those two categories the range of quality is enormous. A custodial account with a low-cost fund company can give you index funds costing a few hundredths of a percent a year. A variable annuity sold in a faculty lounge can cost 2% or more a year once you add the mortality and expense charge, the underlying fund fees, and any rider fees, and it often carries a surrender charge if you move the money out within a set period, commonly 5 to 10 years from each contribution. The mechanics of how fees compound over decades are in retirement account fees, and the difference between a 0.1% and a 2% annual cost over a career is measured in years of retirement income.

Many school districts contract with a list of approved vendors, sometimes a dozen or more, and each teacher picks one. This is the part I misunderstood for years. I assumed the district had vetted the choices; it had only checked that the vendors would handle the paperwork. I got lucky: the vendor I happened to sign with ran a custodial account with a short menu of cheap institutional funds, and when I finally pulled the fee disclosures before retiring, it turned out to be the cheapest account I owned. Two colleagues who signed with a different name on the same list were in variable annuities costing well over 2% a year, with surrender charges still running. Same district, same form, wildly different outcomes. What mine never offered was a plain index fund, which is why I keep a Roth IRA for those. If your district’s list includes a mutual fund custodian, you can usually redirect future contributions there with a form. If it does not, several teachers asking the business office to add one has worked in plenty of districts.

The 457(b) alongside it

Many public school and government employees can contribute to both a 403(b) and a 457(b) in the same year, and each plan has its own separate $24,500 limit for 2026². For a household that can afford it, that is $49,000 of pre-tax or Roth space before any catch-up, roughly double what a private-sector worker with a single 401(k) can shelter.

The 457(b) has two features worth knowing. A governmental 457(b) has no 10% early-withdrawal penalty once you have left the job, at any age, which makes it a natural bridge account for anyone retiring early, before 59½,. And it has its own special catch-up in the three years before the plan’s normal retirement age, which can allow up to double the standard limit in those years, though it cannot be stacked on the age 50 catch-up in the same year; you get whichever is larger. The exact rules depend on the plan document, and a 457(b) at a nonprofit (rather than a government employer) is a different and less protected animal, so ask which kind you have.

Taking the money out

The 403(b) follows the same exit rules as a 401(k): a 10% penalty on top of income tax for most withdrawals before 59½, the Rule of 55 if you leave the employer at 55 or later, and required minimum distributions from age 73 (rising to 75 in 2033)⁵. Traditional withdrawals are taxed as ordinary income; qualified Roth 403(b) withdrawals are tax-free, and Roth balances no longer have RMDs for the original owner.

When you leave the job you can leave the account where it is, roll it into a new employer’s plan, or roll it into an IRA, and a direct trustee-to-trustee rollover avoids both the tax and the 20% mandatory withholding that comes with a check made out to you. The step-by-step, including the 60-day trap, is in the 401(k) rollover guide, and it applies to a 403(b) without change.

The one 403(b)-specific wrinkle is surrender charges. If your money sits in an annuity contract with a surrender period still running, rolling it out can cost several percent of the balance. In that case it is sometimes cheaper to leave the contract alone until the period ends, or to move only the portion that is past it. The vendor is required to tell you the surrender schedule; ask for it in writing, and read it before signing any rollover form, because that number is not on the front page of anything.

One last note for teachers specifically. In some states, public school employees do not pay into Social Security through their teaching job, which means the pension and the 403(b) have to do more of the work that Social Security does for everyone else. If that describes you, your Social Security statement is worth reading with particular care, because the estimate on it may reflect only your non-teaching years.

None of this is personalized advice about your own plan. The IRS retirement pages and Investor.gov are the free official sources for the rules, your plan’s summary document and each vendor’s fee sheet are the sources for what your specific 403(b) actually costs, and a fiduciary advisor can tell you whether yours is one of the good ones. Investments in any of these accounts can lose value. For how the 403(b) fits the bigger picture, start at retirement planning.