Understanding Your 403(b): A Smart Path to Retirement Savings

If you work for a public school, nonprofit, or certain government organization, you’ve likely heard of the 403(b) retirement plan — sometimes called a “tax-sheltered annuity.” But what exactly is it, and how can it help you secure your financial future?

What Is a 403(b) Plan?

A 403(b) plan is a retirement savings plan designed specifically for employees of public schools, certain nonprofits, and some churches. It works similarly to a 401(k) plan offered by private companies, but with a few distinct features. You can contribute a portion of your paycheck before taxes, which lowers your taxable income now while helping your savings grow tax-deferred until retirement.

How Contributions Work

• Traditional 403(b): You contribute pre-tax dollars, and you’ll pay taxes when you withdraw funds in retirement.

• Roth 403(b): You contribute after-tax dollars, but qualified withdrawals are tax-free in retirement.

• Contribution limits (2025): You can contribute up to $23,000 per year, plus an additional $7,500 catch-up if you’re age 50 or older.

Some employers may also match your contributions — which is essentially free money added to your retirement account.

Investment Options

Most 403(b) plans offer a mix of mutual funds and annuities, allowing you to tailor your investment strategy to your risk tolerance and goals. While annuities can provide guaranteed income, mutual funds typically offer more growth potential over time.

Advantages of a 403(b)

• Tax advantages: Either defer taxes now or avoid them later (with a Roth).

• Automatic payroll deductions: Easy, consistent saving.

• Catch-up provisions: Special rules allow long-term employees to save even more.

• Portability: If you change jobs, you can often roll your 403(b) into another qualified plan or IRA.

Things to Watch Out For

While 403(b)s are powerful savings tools, it’s important to watch for:

• High fees: Some annuity-based plans come with higher costs.

• Limited investment choices: Not all plans offer a wide range of funds.

• Withdrawal restrictions: Early withdrawals (before age 59½) may trigger taxes and penalties.

Getting Started

To make the most of your 403(b):

1. Sign up early — the sooner you start, the more time your money has to grow.

2. Maximize employer matches — don’t leave free money on the table.

3. Review your investment mix at least once a year.

4. Increase contributions gradually as your salary grows.

Final Thoughts

Your 403(b) plan is one of the most effective tools for building long-term wealth. Even small, consistent contributions can grow substantially over time thanks to compound interest. By understanding how your plan works and making informed decisions, you can turn your 403(b) into a cornerstone of your retirement security.