Millions of public school workers, along with some employees at colleges and universities, hospitals, charities, and other nonprofit organizations, use 403(b) plans to save for retirement.
As is the case with employer-provided 401(k) plans, 403(b) plans are tax-advantaged. Contributions are typically deducted from your paycheck and invested. Pretax contributions will reduce your taxable income, and your investments will grow tax-deferred until you retire. If your plan offers a Roth option, contributions are after-tax, but withdrawals will be tax-free as long as you’re 59½ or older and have owned the account for at least five years.
Employers may offer a matching contribution to a 403(b) up to a certain threshold (a maximum 3 percent of your salary, for example). Most public schools don’t offer a match, but if your employer provides one, consider contributing at least enough to earn it.
Most pensions for teachers who work 30 years or more replace 50–70 percent of their salary, so a 403(b) can fill the gap, says Dan Otter, co-founder of 403bwise, a nonprofit that advocates for better retirement plans for K–12 teachers.
But 403(b)s have some key characteristics that make them unique—and sometimes less than desirable.
Certain benefits that 403(b)s offer aren’t available with other types of employer-provided plans. The regular contribution limit is the same as with 401(k) plans—$23,000 in 2024 for workers younger than 50. And employees age 50 or older can make $7,500 in catch-up contributions to a 403(b) this year, just as those who have a 401(k) can. But some employers permit longtime employees to make additional catch-up contributions to a 403(b). If you’ve been with an employer for at least 15 years and you’ve made an annual average contribution of less than $5,000 per year, you can contribute an additional $3,000 per year, up to a lifetime maximum catch-up contribution of $15,000.
You can take advantage of the 15-year rule even if you’re younger than 50. For those who are 50 or older, the Internal Revenue Service will apply contributions above the regular limit first to the 15-year rule, then to the standard catch-up contribution limit. If your employer allows these extra catch-up contributions, “they can be a great way to boost your tax-smart retirement savings plan,” says Noah Damsky, a certified financial planner based in Los Angeles.
On the downside, 403(b) plans aren’t subject to the Employee Retirement Income Security Act (ERISA), which means employers don’t have the same fiduciary obligations as companies that offer 401(k) plans, Otter says.
As a result, many teachers are offered anywhere from 20 to 100 different plans, often provided by insurance agents promoting high-cost variable annuities, says Nicholas Bunio, a certified financial planner based in Philadelphia. Though many 403(b) plans have lackluster offerings, the problem really lies with plans for employees in K–12 public schools, he says.
