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What is a 403(b)? Understanding your public sector retirement plan

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FS Productions/Getty Images/Tetra images RF

You've devoted your career to the service of others. Whether you're a teacher, librarian, minister, government employee, medical practitioner or other public sector professional—your benefits may include a 403(b) retirement plan.

These days, 401(k)s tend to dominate the retirement savings conversation. So if a 403(b) is the retirement plan offered by your employer, you may have questions. We've got you covered. It's important to break down the plans' key features, options and differences.

What is a 403(b), and how does it work?

A 403(b) is an employer-sponsored retirement savings plan for public sector employees. Your employer may offer a 403(b) if you're employed full-time by a public school, government entity, church or other 503(c)(3) organization. As with a 401(k), a 403(b) helps you save for retirement through payroll deductions while enjoying tax benefits. You decide how much to deduct from each paycheck as a percentage of your income or a set amount.

Your money is then sent to a personal retirement account that houses your investments. 403(b) investment options typically include annuities or mutual funds:

  • An annuity is an agreement between you and an insurance company. You pay premiums and the insurance company promises recurring payments to you later on.
  • mutual fund is an investment vehicle where your money is pooled with other investors to mutually buy a collection of stocks, bonds and other securities.

As with any investment, earnings are not guaranteed. There's always a risk of loss in the market. But investing long-term may give your money the best chance to grow.

How to choose between a traditional & a Roth 403(b)

Like other types of employer-sponsored retirement plans, 403(b)s fall into an income tax bucket of either "tax now," "tax later" or "tax never." When deciding between a traditional or Roth 403(b), the main consideration is the different times in which you'll pay taxes.

With a traditional 403(b), you contribute pretax dollars.

  • Consider if you are in your peak earning years now and expect to be in a lower tax bracket in retirement.

This means the money comes straight out of your paycheck before you've paid any taxes on it so you can expect to be "taxed later" when you make withdrawals. Deducting pretax dollars lowers your gross income, reducing your total tax liability for the current tax year.

At a certain age, you will be required to take a required minimum distribution (RMD). That's an amount you must withdraw from your account each year. However, RMDs can be delayed if you are still working.

With a Roth 403(b), you contribute after-tax dollars.

  • Consider if you feel your peak earning years may happen later in life and you expect to be in a higher tax bracket in retirement.

With Roth 403(b)s, you've already paid tax on the money you're contributing. But by paying taxes now, you can withdraw money from the account without any additional tax liability in retirement, given you meet certain requirements.1 Another benefit of Roth 403(b)s are that the earnings grow tax-free which put them into the "tax never" bucket.

Once you meet a qualifying event for distribution, you can make withdrawals from your 403(b) plan. However, withdrawals will be taxable and may face a 10% tax penalty. And, similar to a traditional 403(b), you'll have an RMD requirement at a specific age unless you're still working. However, the Secure Act 2.0 has revised this rule. Starting in 2024, there will be no RMD requirement on Roth 403(b) accounts.

403(b) contribution limits

The IRS sets an annual contribution limit for your 403(b). In addition, if you're 50 or older, you can make catch-up contributions as an additional boost to your savings.

  • 2023 contribution limit: $22,500
  • 2024 contribution limit: $23,000
  • Catch-up limit: $7,500

Due to the Secure Act 2.0, starting in 2025 403(b) plan participants ages 60-63 will be able to contribute even more to catch-up. The limit will increase to the greater of $10,000 or 150% of the designated catch-up contribution amount for that year. The $10,000 amount will be adjusted for inflation annually starting in 2026.

403(b)s offer the potential for employer contribution matches

In addition to your contribution, some employers offer a match, where the employer contributes to your 403(b). The amount can vary, but it's usually based on a portion of what you give, up to a maximum amount. Think of it as free money and take advantage by contributing enough to get the full match. Keep in mind the combined employee-employer contributions can't exceed $66,000 in 2023 or $69,000 in 2024 if you are under 50, or 100% of your annual salary (whichever is less).

Not sure where you currently stand with your goals? Use a retirement income planning calculator to gauge your progress and see if any adjustments need to be made to your plan.

What is the difference between a 401(k) & 403(b)?

While 403(b) and 401(k) plans are similar, they do have notable differences.

  • Access: The largest difference is who has access. A 401(k) is offered to private sector employees, while a 403(b) is for public sector employees.
  • Investment options: 403(b) plans usually include annuities and mutual funds. 401(k) plans have more variety, allowing participants to invest in individual stocks, bonds and exchange-traded funds.
  • Contribution limits: You may be able to contribute more to a 403(b) than to a 401(k), mainly if you've been with the same employer for 15 years. The additional $3,000 per year you can contribute is only available for 403(b) plans.

if you work for more than one employer and participate in multiple retirement plans, just remember that you face the same contribution limits.

    What happens to an old retirement plan if you change jobs?

    If you find yourself in the middle of a job change, you can handle your previous plan—whether it's a 403(b) or a 401(k)—in a three ways.

    1. Roll it over

    To maximize the potential of your retirement savings, you can roll over your previous plan to a new one. The best way to do this is through a direct rollover, where a check is sent from your old retirement plan to your new account, so you don't owe taxes.

    When rolling over a retirement plan from a previous employer, you have two options:

    • Roll over your old plan to an individual retirement account (IRA). You can move a previous 403(b) plan to an IRA. IRAs tend to have more investment options and can have lower fees, making them more attractive.
    • Roll over your old plan to your new employer. Are you moving an old 401(k) to a 403(b)? Or perhaps consolidating an old 403(b) to a new 403(b)? Keeping your savings in one place can simplify your retirement goals and make it easier to track your progress.

    2. Leave your retirement plan with your former employer

    Retirement plans with a balance of at least $5,000 can stay with your former employer. But you lose a couple of key benefits. You no longer can contribute to the plan, limiting its growth potential. You also don't have any say in your employer's investment selections.

    3. Cash it out

    Though significant penalties often make this option a last resort, you may have the option to cash out your old plan. Remember that withdrawals made before age 59½ are subject to taxes and an early withdrawal penalty, so make sure you are aware of your costs, including both taxes and penalties before making this decision. You might be able to avoid the 10% early withdrawal penalty if you're age 55 or older in the year that you terminate service.2

    Getting the most from your 403(b)

    A 403(b) plan can be a nice employer benefit—and double as a core component of your investment strategy. The tax-friendly payroll deductions can support your retirement goals. But it's crucial to research your options to determine what's best for you.

    Are you on track with your retirement goals? Connect with a Thrivent financial advisor to learn more about your 403(b) plan, check in on your progress and explore other retirement savings resources.

    1 Distributions of earnings are tax-free as long as your Roth IRA, Roth 403(b) or Roth 401(k) is at least five years old and one of the following requirements is met: (1) you are at least age 59½; (2) you are disabled; (3) you are purchasing your first home ($10,000 lifetime maximum); or (4) the money is being paid to a beneficiary.

    2 There may be benefits to leaving your account in your employer plan if allowed: You will continue to benefit from tax deferral; there may be investment options unique to your plan; fees and expenses may be lower; plan assets have unlimited protection from creditors under federal law; there is a possibility for loans; and distributions are penalty-free if you terminate service at age 55+. Consult your tax professional prior to requesting a rollover from your employer plan.

    Thrivent and its financial advisors and professionals do not provide legal, accounting or tax advice. Consult your attorney or tax professional.

    Investing involves risk, including the possible loss of principal. The prospectus and summary prospectuses of the variable annuity contract and underlying investment options contain information on investment objectives, risks, charges and expenses, which investors should read carefully and consider before investing. Available at