Depending on your income, you may be eligible for an
income tax credit of up to $1,000 for amounts contributed
to a 403(b) plan.
Due to the Coronavirus Aid, Relief, and Economic Security (CARES) Act, penalty-free withdrawals of up to $100,000 may be allowed in 2020 for qualified individuals affected by COVID-19. Individuals will be able to spread the associated income over three years for income tax purposes and will have up to three years to reinvest withdrawn amounts.
While your pre-tax elective deferrals aren't subject to income
tax when made, they are subject to FICA tax. Your
Social Security benefits are not affected by your decision
to make pre-tax contributions to your account.
1If you have both a traditional IRA and a Roth IRA, your combined contributions to both cannot exceed $6,000 ($7,000 if age 50 or older) in 2020.
2When considering a rollover, to either an IRA or to another employer's retirement plan, you should consider carefully the investment options, fees and expenses, services, ability to make penalty-free withdrawals, degree of creditor protection, and distribution requirements associated with each option. A cash distribution will be subject to regular income taxes and, if taken prior to reaching age 59½, a 10% penalty, unless an exception applies.
3Due to the CARES Act, required minimum distributions (RMDs) are waived in 2020.
A 403(b) plan is an employer-sponsored retirement
plan for certain employees of public schools, tax-exempt
[501(c)(3)] organizations, and churches.
The employer can purchase annuity contracts for
eligible employees, or establish custodial accounts
to be invested in mutual funds or other investments.
In the case of annuity contracts, a 403(b)
plan is sometimes referred to as a tax-sheltered annuity (TSA)
plan. (Church plans are subject to several special rules not
How does a 403(b) plan work?
Depending on the specific type of 403(b) plan, contributions
may be made by the employee, the employer, or both. Many 403(b) plans are similar to 401(k)
plans: you elect either to receive cash payments (wages) from
your employer immediately, or to defer receipt of all or part of
that income to your 403(b) account. The amount you defer
(called an "elective deferral") can be either pre-tax or, if your
plan permits, after-tax Roth contributions.
Employer contributions, if made, may be a fixed percentage of
your compensation, or may match a specified percentage of
your contribution, or may be discretionary on the part of the
employer. One unique characteristic of 403(b) plans is that
your employer is allowed to make contributions to your account
for up to five years after you terminate employment.
Who can participate?
In general, if any employee is eligible to make elective deferrals,
then all employees must be allowed to do so. This is
called the "universal availability rule." However, your employer
can exclude certain groups of employees from participation
[for example, employees who normally work less than 20
hours per week, or who are eligible under another deferral
plan — for example, a 401(k) plan — of the employer].
Your employer may also require that you attain age 21 and/or
complete up to two years of service before you're eligible for
Some 403(b) plans provide for automatic enrollment once
you've satisfied the plan's eligibility requirements. For example,
the plan might provide that you'll be automatically enrolled
at a 3% pre-tax contribution rate (or some other percentage)
unless you elect a different deferral percentage, or choose not
to participate at all. If you've been automatically enrolled in
your 403(b) plan, make sure that the contribution rate and investments in your portfolio are appropriate for your circumstances.
What are the contribution limits?
You can defer up to $19,500 of your pay to a 403(b) plan in
2020 (up from $19,000 in 2019). If your plan allows Roth contributions, you can split your
contribution between pre-tax and Roth contributions any way
you wish. Unlike 401(k) plans, employee elective deferrals to
403(b) plans aren't subject to discrimination testing [which in
401(k) plans can often significantly limit the amount higher-paid
employees can defer].
If your plan permits, you may also be able to make "catch-up"
contributions to your account. You can contribute up to an
additional $6,500 in 2020 (up from $6,000 in 2019) if you'll be age 50 or older by the end
of the year. If you have 15 years of service with your employer
(even if you haven't attained age 50) a special Section 403(b)
rule may also allow you to make annual catch-up contributions
of $3,000, up to $15,000 lifetime. If you're eligible for both
rules, then any catch-up contributions you make count first
against your 15-year $15,000 lifetime limit.
If you also contribute to a 401(k), 403(b), SIMPLE, or SARSEP
plan maintained by the same or a different employer,
then your total elective deferrals to all of these plans — both
pre-tax and Roth — can't exceed $19,500 in 2020, plus catch-up
contributions ($19,000 in 2019, plus catch-up contributions). It's up to you to make sure you don't exceed the
limits if you contribute to plans of more than one employer.
Total contributions to your 403(b) account — both yours and
your employer's — can't exceed $57,000 in 2020 (or 100% of
your compensation, if less). Age 50 catch-up contributions are
not included in this limit, but special Section 403(b) catch-up
contributions are. (Aggregation rules may apply if you also
participate in a qualified retirement plan.)
Can I also contribute to an IRA?
Your participation in a 403(b) plan has no impact on your
ability to contribute to an IRA. You can contribute up to $6,000
to an IRA in 2020 (unchanged from 2019), $7,000 if you'll be age 50 or older by the
end of the year (or, if less, 100% of your taxable compensation).
However, depending on your income level, your ability to
make deductible contributions to a traditional IRA may be limited
if you contribute to a 403(b) plan. (Your income and filing status may
also impact your ability to contribute to a Roth IRA.)1
Income tax considerations
When you make pre-tax 403(b) contributions, you don't pay current income taxes on those dollars (which means more
take-home pay compared to an after-tax contribution of the
same amount). But your contributions and investment earnings
are fully taxable when you receive a distribution from the plan.
In contrast, your after-tax Roth 403(b) contributions are subject
to income taxes up front, but are tax free when distributed to
you from the plan. And, if your distribution is qualified, then
any earnings are also tax free.
In general, a distribution from your Roth 403(b) account is
qualified only if it's made after the end of a five-year waiting period, and
the payment is made after you turn 59½, become
disabled, or die.
If your distribution is nonqualified, then you're deemed to receive
a pro-rata portion of your tax-free Roth contributions and
your taxable earnings.
Your employer's contributions are always made on a pre-tax
basis, even if they match your Roth contributions. That is, your
employer's contributions, and any investment earnings on
those contributions, are always taxable to you when you receive
a distribution from the plan.
If you receive a payment from your 403(b) account before you
turn 59½ (55 in certain cases), the taxable portion may also be
subject to a 10% early distribution penalty, unless an exception
When can I access my money?
In general, you can't withdraw your elective deferrals from your
403(b) until you reach age 59½, become disabled, or terminate
employment (deferrals to annuity contracts prior to 1989
aren't subject to these restrictions). Some plans allow you to
make a withdrawal if you have an immediate and heavy financial
need ("hardship"), but this should be a last resort. You withdrawal will be subject to regular income taxes and a possible 10% penalty tax. If your
plan allows after-tax (non-Roth) contributions, your plan can let
you withdraw these dollars at any time.
Employer contributions to 403(b) custodial accounts are subject
to similar withdrawal restrictions. But employer contributions and pre-1989 deferrals to 403(b) annuity contracts are
subject to somewhat more lenient distribution rules. Check
with your plan administrator for your plan's specific rules.
If your plan permits loans, you may be able to borrow up to
one-half of your vested 403(b) account balance (to a maximum
of $50,000) if you need the money.
What happens when I terminate employment?
Generally, you forfeit all employer contributions that haven't
vested. "Vesting" means that you own the contributions. Your
plan may require up to six years of service before you're fully
vested in employer contributions, although some plans have
much faster vesting schedules. (Your own contributions are
always 100% vested.) You can generally leave your money in
your 403(b) account, transfer it to a new 403(b) account, roll
your dollars over to an IRA or to another employer's retirement
plan, or take a cash distribution.2
What else do I need to know?
You must begin taking distributions ("required minimum
distributions," or RMDs) from your 403(b) account after
you reach age 72 (or after you terminate employment, if
later). (The RMD rules don't apply to contributions
made prior to 1987.)3
If your employer offers 403(b)s from various vendors, you
may be able to transfer your assets from one contract to
another while you're still employed. This can be helpful if
you're dissatisfied with a particular vendor's investment
Your 403(b) account is fully protected from creditors under
federal law in the event of your bankruptcy. If your plan is
covered by ERISA, then your account is generally protected
from all of your creditors' claims.