Today's Top
Annuity Rates

2 Year

3 Year

6.30% Simple
5 Year

10 Year

The Power of 403(b) Plans: Building a Secure Retirement

Retired Couple stripping their suit off and running towards blue ocean. My Annuity Store logo top left corner.

Planning for a financially secure retirement is a common goal shared by many investors. A 403(b) plan (tax-sheltered annuity plan or TSA) is a retirement plan offered by public schools and certain charities and is similar to a 401(k) plan maintained by a for-profit entity.

Just as with a 401(k) plan, a 403(b) plan provides employees the opportunity to defer some of their salary and save for retirement while enjoying potential tax advantages.

This unbiased guide explains the various types of 403(b) plans, how they work, contribution and withdrawal rules, and finish with the pros and cons. Let’s dive in!

What is a 403(b) Tax-Sheltered Annuity?

A 403(b) tax-sheltered annuity plan is a specialized retirement savings option designed for employees of tax-exempt organizations, including schools, hospitals, and non-profit organizations. They provide employees the opportunity to save for retirement on a tax-deferred basis. 

Similar to a 401(k), contributions to 403(b) tax-sheltered annuities are made with pre-tax dollars, and taxes on contributions and investment gains are deferred until withdrawal during retirement.

403(b) plans definition on blue background with an illustration of hand putting money in a bank and white my annuity store logo bottom center.

How Do 403(b) Plans Work?

An employee decides to participate in the tax-sheltered 403(b) plan their employer offers. The employee determines how much money they want to contribute to the plan. This contribution is deducted from their paycheck on a pre-tax basis, which reduces the employee’s taxable income for that year. 

The money in the 403(b) plan grows tax-deferred, which means the employee doesn’t pay taxes on the contributions or any investment gains until they withdraw their money from the 403(b). The employee may choose how to invest the money in the 403(b) plan, depending on the investment options offered by your individual plan. 

Common investment options include mutual funds, annuities, or other investment vehicles. When the employee reaches retirement age and starts withdrawing money from the 403(b) plan, they will pay income taxes on the withdrawals at their current tax rate.

Pros and Cons of a 403(b) Plan

Like any retirement savings plan, a 403(b) plan has its advantages and disadvantages. Here are some of the pros and cons to consider:



403(b)Taxation and Withdrawal Rules

In addition to loans and hardship distributions, a 403(b) plan may allow employees to take money out of the plan when they:

  • reach age 59½;
  • have a severance from employment;
  • become disabled;
  • die; or
  • encounter financial hardship.

Nevertheless, it’s important to note that early withdrawals (prior to age 59½) may incur a 10% penalty along with applicable taxes.

Required Minimum Distributions (RMDs)

Upon reaching the age of 73, it becomes mandatory to take the required minimum distributions (RMDs) from your tax-sheltered annuity account. The amount of RMDs is determined by your account balance and life expectancy, as assessed by the IRS. 

Failing to adhere to RMD regulations can result in significant tax penalties, making it crucial to be aware of these requirements.

403(b) Plans vs. 401(k)

While both 403(b) plans and 401(k) plans serve as retirement savings vehicles, they possess distinct differences:

  1. Eligible Employers: 403(b) plans are specifically designed for employees of tax-exempt organizations such as schools, hospitals, and non-profit organizations, whereas 401(k) plans cater to employees of for-profit companies.
  2. Contribution Limits: Both plans have annual contribution limits, with 403(b) plans potentially having slightly higher limits in certain cases. For instance, employees over 50 may be eligible for additional catch-up contributions in both plans, but the catch-up contribution limit is higher for 403(b) plans.
  3. Investment Options: While both plans may offer various investment options, 403(b) plans often have more limited choices compared to 401(k) plans. For example, 403(b) plans might primarily offer annuities, while 401(k) plans provide a broader array of investment options, including mutual funds, stocks, and bonds.
  4. Employer Contributions: Both plans can offer employer-matching contributions, but the amount and structure of these contributions may differ between them.
  5. Withdrawal Rules: The rules governing withdrawals from 403(b) plans and 401(k) plans can vary, with 403(b) plans generally being more restrictive. For instance, certain 403(b) plans may require employees to wait until age 59 1/2 before making withdrawals, whereas 401(k) plans may allow withdrawals as early as age 55.

Types of 403(b) Plans

Employers have the flexibility to provide their employees with various types of 403(b) plans. Here are some of the most frequently encountered variations:

  1. Conventional 403(b) plan: The conventional 403(b) plan is the most prevalent option available. It permits employees to contribute funds on a pre-tax basis, allowing them to defer taxes on any investment gains until they decide to withdraw the money during retirement.

  2. Roth 403(b) plan: The Roth 403(b) plan allows employees to make contributions with after-tax dollars. Contributions are made using post-tax income, and any investment gains within the plan are tax-free. Qualified withdrawals made during retirement are also tax-free.

  3. Combination 403(b) plan: Some employers may offer a combination 403(b) plan, which grants employees the opportunity to make both pre-tax and after-tax contributions to the plan. This type of plan provides a certain level of flexibility in terms of contribution options.

  4. Non-ERISA 403(b) plan: Certain tax-exempt organizations, such as churches and religious organizations, may offer a non-ERISA 403(b) plan. This type of plan is not subject to the same federal regulations as traditional 403(b) plans. The specific rules and guidelines governing this plan may vary based on the organization offering it.

  5. Individual 403(b) plan: Designed specifically for self-employed individuals who work for tax-exempt organizations, the individual 403(b) plan enables these individuals to contribute to a retirement savings account on a tax-deferred basis. This plan caters to the unique circumstances of self-employed workers within tax-exempt entities.

Remember, the availability of these 403(b) plan variations may vary depending on the employer and their specific policies.

403(b) Plan Contribution Limits 2023

The limit on elective salary deferrals – the most an employee can contribute to a 403(b) account out of salary – is $22,500 in 2023 ($20,500 in 2022; $19,500 in 2020 and 2021).

Employees who are age 50 or over at the end of the calendar year can also make catch-up contributions of $7,500 in 2023 ($6,500 in 2022, 2020, and 2021; $6,000 in 2015 – 2019) beyond the basic limit on elective deferrals.


This general limit is reduced by the amount of elective deferrals an employee makes to:

How Does a 403(b) Plan Work After You Retire?

403(b) plans are funded with pre-tax dollars and your money grows tax-deferred which means you won’t have to pay taxes now. However, you will pay taxes when you begin to take withdrawals after you retire. 

You can roll over your 403(b) plan into an annuity without any tax consequences. Ultimately you will still pay income taxes once you begin taking withdrawals; however, an annuity may be a better option if you wish to turn your 403(b) plan into a lifetime income stream.

Request an Annuity Quote

Complete the form below and we’ll email your annuity quote within four business hours. For more immediate assistance you can reach us at 855-583-1104, or use our annuity rates calculator.

Frequently Asked Questions

A 403(b) retirement savings plan is specifically designed for employees of public schools, non-profit organizations, and certain religious institutions. It allows participants to contribute a portion of their income on a pre-tax basis into an individual account, which grows tax-deferred until they choose to withdraw the funds.

Similar to a 401(k) plan, a 403(b) plan offers a range of investment options, such as mutual funds or annuity contracts, enabling employees to build their retirement savings effectively. Moreover, many employers provide matching contributions, further enhancing the overall benefits of the plan.

Tax-sheltered annuities (TSAs) are retirement savings plans that enable employees of non-profit organizations, public schools, and certain religious institutions to save for their future by making contributions from their pre-tax income.

Accumulated funds in a TSP grow on a tax-deferred basis over time, providing substantial advantages in terms of long-term financial security. TSAs are commonly offered through 403(b) plans that provide non-profit organizations benefits similar to 401(k) accounts.

Yes, contributions made to a 403(b) retirement plan are subject to FICA taxes. This means that both employer and employee contributions are liable for Social Security and Medicare taxes.


The 2023 FICA tax rate is 7.65%, with 6.2% allocated to Social Security and 1.45% allocated to Medicare taxes. It's important to note that contributions to a tax-sheltered annuity can be made on either a pre-tax or after-tax basis, depending on the specific rules outlined by the plan.

Generally speaking, you must be an employee of tax-exempt organizations, such as public schools, colleges, and universities, and specific nonprofit organizations, such as teachers, professors, and staff members to be eligible for a tax-sheltered annuity (TSA).


In some cases, ministers and employees of specific state and local government organizations may also be eligible.


There are two types of 403(b) safe harbor plans. One type is the 403(b) safe harbor non-elective plan design. Generally, a 3 percent contribution is provided to all employees eligible to make elective deferrals to the plan.


The guaranteed contribution requires that a 3 percent employer contribution be made each plan year unless the plan sponsor amends the plan and removes the provision before the start of the new plan year. The safe harbor contribution is immediately 100 percent vested.


The other type of 403(b) safe harbor plan requires a matching contribution. There are two options: the basic match or the enhanced match.

Get a Annuity Quote

Withiin four business hours.

Request for Quote (#17)
Jason Caudill Picture standing chest up.

As Seen On:

NBC logo
ABC Logo
fox logo
MarketWatch logo
Investopedia logo
CBS Logo
My Annuity Store Live Life Better All Rights Registered
Request an Annuity Quote
Request for Quote (#17)
My Annuity Store, Inc. BBB Blue Seal