The ABCs of 403(b)s: What You Need to Know About This Retirement Plan

NeilLockhart/Getty Images

Public school teachers have some tough choices to make when it comes to saving for retirement.

One easy decision? You should be saving. Now.

But choosing a retirement savings plan isn’t as easy as it is in the private sector, where most employees get exactly one option from their employers.

Here’s a quick overview to help you pick the right 403(b) plan for you.

What is a 403(b) Account?

If the name looks like a twisted cousin of the 401(k), that’s because the plan sort of is.

A 403(b) is a tax-deferred retirement account employers offer in public schools, colleges, universities, hospitals and nonprofits. It’s also available to some ministers.

It’s similar to its better-known cousin in the for-profit sector, but more complicated and often more costly for the employee.

“Tax-deferred” means your contributions are tax-deductible, just like in a traditional 401(k) or individual retirement account. (Reminder: Here’s how a tax deduction affects your wallet.)

You can contribute up to $18,000 a year to your 403(b). That limit goes up by $3,000 a year if you’ve been with an organization for 15 years. If you’re over 50, you can add another $6,000 a year to your maximum contributions.

Like in other retirement plans, the money you contribute to a 403(b) gets invested, so it grows over time. That’s why you should start saving ASAP — so it has time to balloon before you retire.

Save for a few exceptions, you can’t withdraw money from your 403(b) retirement account until you’re 59 ½. Tap into it before that, and you’ll pay big in taxes and fees.

As with a 401(k), your employer might match your contributions up to a certain percentage of your salary.

Here’s Where it Gets Complicated

Unlike a 401(k), where your employer usually works with a single provider to manage the plan, employees can often choose from several 403(b) providers.

That sounds good, right? Always nice to have options.

No, not really. It’s not so great to have dozens or hundreds of choices when you don’t understand a single one of them.

Imagine if Gordon Ramsay asked you to choose from 100 risottos.

Did you even know there were 100 different kinds of risotto? Wait — do you know what’s in a risotto? Can’t he just make you the best one and be done with it?

Before choosing a 403(b) plan, you must do your research. Take advantage of your HR department (Side note: Do ministers have those?), and vet plans like you would a 401(k). Here are some questions to ask:

  • Who provides the plan? (Insurance companies tend to charge the highest fees.)
  • Where is the money invested? (Professionally managed mutual funds come with higher fees.)
  • Who can answer your questions? Find out who’s available to give you information about the plan, even after you sign up, so you’re not stabbing at risottos in the dark.

Most importantly, make sure you understand the fees you’ll pay and the commission structure for the person trying to sell you the plan.

If you can, consult with an independent financial expert — someone whose pay doesn’t depend on which plan you select.

403(b) vs. IRA

One more question to throw a wrench into this whole operation: Would you be better off with an IRA?

Typically, no. Your contribution limit for a 403(b) is way higher, and your employer match is free money you’ll never see with an IRA. But the individual plan might be a good alternative to a bad 403(b) — or a complement to a good one.

You’re already doing your research, anyway. Here’s what you need to know about IRAs.

Your Turn: Do you have a 403(b) retirement savings plan?

Dana Sitar (@danasitar) is a senior writer at The Penny Hoarder. She’s written for Huffington Post,, Writer’s Digest and more, attempting humor wherever it’s allowed (and sometimes where it’s not).