403(b) Explained
A 403(b) is a tax-advantaged retirement plan for employees of public schools, hospitals, churches, and nonprofit organizations. It works almost identically to a 401(k) — you contribute pre-tax money, it grows tax-deferred, and you pay taxes when you withdraw in retirement. The key differences are in investment options and fees.
Key Features
- Contribution limits — Same as 401(k): $23,000/year ($30,500 if 50+). Additionally, employees with 15+ years of service may qualify for an extra $3,000/year catch-up (up to $15,000 lifetime)
- Employer match — Many employers match contributions, though matches in the nonprofit/education sector tend to be smaller than corporate 401(k) matches. Always contribute enough to get the full match
- Investment options — Traditional 403(b) plans often feature annuity products (from insurance companies like TIAA, Valic, or Lincoln). Some offer mutual fund options. Annuities tend to have higher fees
- Roth option — Many 403(b) plans now offer Roth contributions. Same tax-free growth benefits as a Roth IRA. Excellent if your plan offers it
Common 403(b) Pitfalls
- High-fee annuity products — Many 403(b) plans are loaded with expensive insurance-company annuities with 1-2% annual fees plus surrender charges. These can cost you $100,000+ over 30 years compared to low-cost index funds
- Solution — If your plan offers a self-directed brokerage window or low-cost options (Vanguard, Fidelity, TIAA-CREF index funds), choose those. If not, contribute only enough for the employer match, then max out a Roth IRA with low-cost index funds before contributing more to the 403(b)
- Advocate for better options — Teachers and healthcare workers: lobby your employer to add low-cost providers. Many districts have added Vanguard or Fidelity after employee requests