Most people are familiar with the 401(k), but what’s a 403(b)? Basically, a 403(b) is a retirement plan sponsored by a 501(c)(3) organization — a not-for-profit employer. A local school board or hospital are good examples. The employee invests in mutual funds or annuity contracts — the only choices available by law. If annuity contracts are the only investment choice, the plan is likely administered by an insurance company and can also be known as a TSA, or tax-sheltered annuity.
Money can go into your account from two sources: deferrals from your paycheck (money that you could have taken in cash) and employer contributions. The employer’s contributions can be discretionary or according to a match formula. A typical formula: the employer will match 50 cents for every dollar you contribute, up to 6% of your earnings. Generally a 403(b) is going to be driven by your deferrals rather than the employer contribution — 403(b)s are sponsored by nonprofits, remember.
403(b) Savings Limits (2026)
You may defer up to $24,500 per year (2026). The overall limit — your deferrals plus employer contributions combined — is $70,000. That means if you defer the maximum $24,500, your employer may contribute up to $45,500 on top. Furthermore, if you are age 50 or above, you may defer an additional $8,000 catch-up contribution (total $32,500). Under SECURE 2.0, participants aged 60–63 may make an enhanced catch-up contribution of $11,250 instead of $8,000 (total $35,750).
What Are the Advantages to You?
Automatic savings, principally. Your investment happens every pay cycle without you thinking about it. You don’t have to write a check or make a conscious decision between saving this money or spending it on something that gives more immediate gratification.
Tax savings is another big advantage. As you defer money into the 403(b), you are not taxed on it for federal income tax purposes. You do pay payroll taxes — FICA — but not federal income tax.
The Roth Option
Your Deferrals
Your 403(b) plan may offer a Roth option, in which you defer on an after-tax basis. Much like a Roth IRA, the account grows without taxation, and at retirement you can distribute your funds with no taxable event. Many taxpayers are income-phased out of contributing directly to a Roth IRA — in 2026, the phase-out begins at $153,000 for single taxpayers and $242,000 for married filing jointly. With a Roth option in a 403(b) or 401(k), there is no income phase-out and no $7,500 annual IRA contribution limit. The Roth account also has no required minimum distributions (RMDs) — a rule made permanent by SECURE 2.0, effective 2024. Consider a Roth option carefully: a little pain now from losing an immediate tax deduction is offset by a potentially huge gain — growing a retirement account with no taxes on distribution.
Your Employer’s Contributions
Your employer’s contributions will always go to the non-Roth (traditional) account. This makes sense because the employer is deducting contributions as a business expense. Over the years the account grows without federal taxation — compounding earnings upon earnings — and the effect can be enormous. With a serious deferral and employer contributions, you can end up with hundreds of thousands of dollars, or into seven figures, if you’re very disciplined.
Taxation Issues
Apart from Roth contributions, when you retire and take money out of your 403(b), the distributions will be taxable as ordinary income. There’s your trade-off: you’re trading the benefit of tax deductibility and tax deferral now for what may be higher ordinary income tax rates in the future.
Investment Choices
Mutual Funds
Your employer’s plan sponsor will provide a universe of investment choices — mutual funds and annuity contracts. By statute, there are no other choices, unlike the 401(k). The fund options will typically cover all bases: government and corporate bond funds, US common stock funds, international stock funds, and various target date funds. Target date funds are a common default — they become progressively more conservatively allocated as your retirement date (the “target date”) approaches.
Annuities
If your plan offers an annuity option, we would steer you away from any variable annuity allocation. Since your 403(b) account already has tax deferral by definition, there is no reason to pay variable annuity fees for a benefit you already have.
The investment allocation you choose is a very important consideration. If you are launching your career or in the early stages with a long working life ahead, we’ll generally say: go aggressive. When you have down months or down years, you’re buying in at bargain prices. When the market recovers, those dollars will work the hardest for you.
Invest!
The main takeaway: invest — defer — up to the employer match at least. Otherwise you’re leaving money on the table. Increase your contributions year by year, and let the time value of money work for you. For more information on working with CameronDowning see Investment Frequently Asked Questions.
