403(b)

A 403(b), also called a tax-sheltered annuity (TSA) plan, is set up by the employer, and you choose how much of your pay to defer into it. Traditional contributions come out before income tax, although Social Security and Medicare tax still apply; Roth contributions come out after tax, and qualified withdrawals are tax-free. Some employers add money of their own.

By law, the money can sit in only three kinds of account: an annuity contract from an insurance company, a custodial account invested in mutual funds, or a retirement income account for church employees. That narrow menu is the biggest practical difference from a 401(k).

A 403(b) also follows a universal availability rule. If the employer lets one employee make salary deferrals, it generally must let all of them, apart from narrow exclusions such as people who normally work under 20 hours a week, certain students, and employees already in another of the employer’s plans.

Money can come out when you reach 59½, leave the employer, become disabled or die, and a plan may also allow hardship withdrawals and loans. Taxable withdrawals before 59½ face a 10% additional tax unless an exception applies; the rule of 55 covers a 403(b) if you leave the job in or after the year you turn 55.

Two ceilings apply. The first caps what you defer from salary: $24,500 for 2026. It is a personal limit shared with any 401(k) or SIMPLE plan you contribute to, even at another employer, but not with a 457(b) plan, which has its own. The second caps everything added to your account in a year, your deferrals plus employer money: the lesser of $72,000 or 100% of your includible compensation from that employer. Catch-up contributions sit on top of both ceilings if your plan offers them.

The 15-year rule exists only in 403(b) plans. If your plan offers it and you have at least 15 years of service with the same school or other educational organization, hospital, home health service agency, health and welfare service agency, church or convention of churches, your deferral limit rises by the least of three amounts: $3,000; $15,000 minus the 15-year catch-ups you have already used; and $5,000 times your years of service there, minus all your earlier deferrals to that employer’s plans.

The third test usually decides the answer. It rewards people who contributed little in their early years, so a long-serving employee who deferred more than $5,000 a year on average gets nothing from it. The $15,000 lifetime cap means the extra $3,000 can last at most five years.

When you qualify for both this and the age-50 catch-up, the law applies deferrals above $24,500 to the 15-year catch-up first and only then to the age-based one. Used together in 2026, they allow up to $35,500 of deferrals, or $38,750 in the years you turn 60 through 63. Counting years of service wrongly is a common plan error, so confirm your eligibility with the plan before you rely on it.

Neither is better by design. For taxes and limits the two plans are near twins: the same deferral limit, shared between them, the same catch-ups and Roth option, the same withdrawal ages and the same required minimum distributions. The differences come from who sponsors them and what the law lets them hold. Your employer decides which one you get, so the useful comparison is your own plan’s match, investment menu and fees against the alternatives open to you.

Some employers let you choose among several outside vendors, often including insurance companies, to hold your 403(b). The SEC warns that an employer’s approved list is not an endorsement and that fees vary widely from one product to the next. An annuity’s own tax deferral adds nothing inside a plan that already defers tax, yet an annuity can carry ongoing charges and a surrender charge that declines over several years if you move money out early.

Before choosing, compare the ongoing cost of each option, such as a mutual fund’s expense ratio or an annuity’s administrative charges, plus any vendor fees. Then ask three questions: what fees you will pay, what penalty applies if you switch investments, and whether the seller earns more for one product than another. A cost gap of a fraction of a percentage point a year compounds over a 30-year career, so a low-cost index fund on the menu is worth comparing against every annuity option.