403(b) Plan: How It Works and Pros & Cons

403(b) Retirement Plans for Teachers & Non-Profit Employees

By Robin Hartill, CFP – Updated Nov 18, 2025 at 9:21 AM | Fact-checked by Margo Winton Parodi

Key Points

403(b) plans offer tax-deferred and Roth options with high contribution limits and potential employer matching.
Drawbacks include limited investment choices, higher fees, and penalties for early withdrawals.
Eligibility for extra $3,000 annual contributions exists for employees with at least 15 years with the same employer.

Unless you're a teacher or an employee of a tax-exempt organization, you may not be familiar with the 403(b). Named after the section of the tax code that describes it, a 403(b) is a special type of retirement savings plan that's similar to a 401(k) in many ways but with a few key differences.

Here's a brief overview of 403(b) retirement plans, including their pros, cons, and contribution limits, to help you make the most of this account.

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An infographic explaining what a 403(b) retirement plan is, who is eligible for it, and how it is taxed. — Image source: The Motley Fool

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Table by author.
Pros	Cons
Tax advantages	Few investment choices
High contribution limits	High fees
Employer matching	Penalties on early withdrawals
Shorter vesting schedules	Not always subject to ERISA
Extra catch-up contributions

Benefits of a 403(b) plan

The advantages of contributing to a 403(b) account include:

Tax advantages: Overall, 403(b) accounts carry the same tax advantages as 401(k)s and IRAs. Depending on whether you choose a traditional or a Roth 403(b), you can enjoy a smaller tax bill this year in exchange for paying taxes on distributions in retirement or tax-free withdrawals in retirement if you pay taxes on your contributions.
High contribution limits: Contribution limits for 403(b) accounts, discussed below, are on par with 401(k) contribution limits and much higher than IRA contribution limits.
Employer matching: Employers offering 403(b) plans may offer to match some of their employees' personal contributions just as companies offering a 401(k) might do. Each company has its own rules about how, when, and if it will match employee contributions. Check with your HR department for specific details about your company's matching program.
Shorter vesting schedules: Vesting schedules determine when your employer-matched funds are yours to keep. This varies by company, but 403(b) vesting schedules are typically shorter than 401(k) vesting schedules. Some 403(b)s may offer immediate vesting, meaning you get to keep all employer-matched funds that have been made no matter when you leave that job.
Extra catch-up contributions: In addition to the standard catch-up contributions available to adults 50 and older and the new, higher catch-up contribution for adults 60 to 63 that debuted in 2025, 403(b)s enable participants who have worked for the same employer for at least 15 years to contribute up to $3,000 in additional funds per year to their accounts.

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Drawbacks of a 403(b) plan

Some of the drawbacks to remember when contributing to a 403(b) account are:

Few investment choices: Up until recently, 403(b)s offered only variable annuities. While this is no longer the case, this type of account offers more limited investment options than a 401(k) or an IRA does.
High fees: Some 403(b)s charge higher fees that can eat into your profits, although this isn't true of all of them. Do some research into the plan's administrative costs and any fees associated with your investments and try to keep these as low as possible to maximize your profits.
Penalties on early withdrawals: If you withdraw funds from your tax-deferred 403(b) before age 59 1/2, you'll pay a 10% early withdrawal penalty in addition to taxes. However, the penalty is waived if you have a qualifying reason, such as a large medical expense. Note that this is also true of IRAs and 401(k)s.
Not always subject to ERISA: The Employee Retirement Income Security Act (ERISA) institutes minimum standards for retirement plans, including reporting and fiduciary standards, to protect employees. But many 403(b)s aren't subject to ERISA. That doesn't mean they're bad plans, but you should do some more research to decide if it's the right home for your money before you begin contributing.

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