How does a 403(b) work?
Last updated August 2026
Short answer
For most participants the plan works exactly like a 401(k). The place it diverges, and where the money is, is the fund menu.
Who has one
Employees of public school districts, colleges and universities, hospitals and healthcare systems, churches and religious organisations, and other 501(c)(3) nonprofits.
Teachers and healthcare workers are the two largest groups, and many have been contributing for decades without ever comparing the options inside the plan.
Some plans are governed by ERISA and some are not, which affects the fiduciary duties the sponsor owes and how closely the menu is scrutinised.
The 2026 limits
$24,500 in elective deferrals, identical to a 401(k), covering pre-tax and Roth contributions together.
An $8,000 catch-up applies from age 50, and $11,250 at ages 60 to 63.
Employer contributions sit on top, within the overall annual additions limit of $72,000 for 2026.
The 15-year service catch-up
Employees with at least 15 years of service with the same qualifying employer may contribute up to an additional $3,000 a year.
It is capped at $15,000 over a lifetime and reduced by amounts already used, so the calculation depends on your full contribution history.
It is optional for plans to offer, and it stacks with the age-based catch-up where both apply. No 401(k) has anything equivalent.
Try it in Walnut
Walnut connects to brokerage accounts and analyses what you hold. Whether a 403(b) can be connected depends on the plan's recordkeeper.
The annuity problem
403(b) plans originated as tax-sheltered annuities, and insurance products remain common in the menus.
Variable annuities inside a tax-advantaged account add a layer of cost for a tax benefit the account already provides.
Surrender charges are the sharper issue, since they can apply for years and make moving money expensive. The contract states them, and the number is worth finding before you decide anything.
What to check in your own plan
Whether a mutual fund custodial account is available alongside the annuity providers, and what the low-cost index options are.
The all-in cost: fund expense ratio, any annuity wrapper fee, and any plan administration charge.
Whether a match exists and what it requires, since that is worth more than any fund selection decision you will make.
Leaving the employer
The balance can stay, move to a new employer's plan, roll into an IRA, or be cashed out with tax and generally a 10% additional tax before 59.5.
Check surrender charges before initiating a rollover, because they are deducted from the amount that moves.
Public sector employees changing districts sometimes find the same provider follows them, which makes staying put simpler than it would otherwise be.
If your plan is not covered by ERISA
Many public school 403(b) plans are non-ERISA, which means lighter fiduciary obligations on the employer.
The practical consequence is menus that were assembled by whoever sold to the district rather than screened for cost.
Where that is the case, the burden of comparing options falls on the participant, and the differences between providers inside one plan can be substantial.
Sources
The 2026 deferral, catch-up and annual additions limits are from IRS Notice 2025-67. Plan rules including the 15-year service catch-up are in Publication 571, and plan types are summarised by the Department of Labor at Types of Retirement Plans. Walnut is informational and is not an investment adviser. This guide is educational and not personalized tax advice.
FAQ
How does a 403(b) work?
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Like a 401(k), for employees of public schools, universities, hospitals, churches and certain nonprofits. You defer salary before tax, or after tax into a Roth option where offered, the money grows without annual tax, and withdrawals in retirement are taxed as income.
How much can I contribute in 2026?
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$24,500 in elective deferrals, the same as a 401(k), with an $8,000 catch-up from age 50 and $11,250 at ages 60 to 63. Some plans also offer a separate 15-year service catch-up.
What is the 15-year rule?
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Employees with 15 years of service at the same qualifying employer may be able to contribute up to $3,000 a year extra, capped at $15,000 lifetime. It is plan-dependent and the calculation is unusual, so ask the plan administrator rather than assuming.
Why are there so many annuities in my plan?
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Because 403(b) plans began as tax-sheltered annuities, and many still default to insurance products. Those often carry higher costs and surrender charges, and a mutual fund custodial account is frequently available alongside them.
Is there an employer match?
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Sometimes, and it is less universal than in 401(k) plans. Where it exists, capturing it is the highest-return action available. Where it does not, the plan is still worth using for the tax treatment.
Can I have a Roth 403(b)?
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Many plans offer one, and it works like a Roth 401(k): after-tax contributions, tax-free qualified withdrawals, no income limit, and the same shared deferral ceiling with pre-tax contributions.
How does it compare to a 401(k)?
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The contribution limits and tax treatment are the same. The differences are the 15-year catch-up, which no 401(k) has, the annuity-heavy investment menus, and generally lighter regulation for some non-ERISA plans.
What happens when I leave?
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The same options as a 401(k): leave it, roll it to a new employer's plan, roll it to an IRA, or cash out. Surrender charges on annuity contracts are the one extra thing to check before moving, since they can make a rollover expensive.