403(b)

A 403(b) is a tax-deferred retirement plan for employees of public schools, 501(c)(3) nonprofits, hospitals, and churches. It works like a 401(k): contributions leave the paycheck before federal income tax, growth compounds untaxed, and withdrawals land as ordinary income in retirement. The 2026 employee deferral is $24,500, with an $8,000 catch-up from age 50 and an enhanced SECURE 2.0 catch-up from 60 to 63, and Roth deferrals are available at most employers. Employer matches exist, and employee plus employer contributions together cap at $72,000 under the same annual additions limit that governs 401(k)s.

The differences are structural, not mathematical. Public-school and church plans are exempt from ERISA, so fee disclosure and fiduciary standards depend on the plan sponsor and state law rather than federal pension law. Since 2009 every 403(b) requires a written plan document, and employees typically pick from a menu of approved vendors. That menu historically skewed toward insurance-company annuities with surrender charges, though low-cost index options are now common in public schools. A separate catch-up for employees with fifteen years of service at the same organization can add up to $3,000 more per year, with a $15,000 lifetime cap.

The mechanics mirror a 401(k). An election is filed with the employer, the contribution leaves the paycheck before federal income tax, and it lands with a vendor from the plan's approved menu. Growth compounds untaxed; distributions in retirement are ordinary income. A Roth 403(b) defers after-tax dollars and compounds tax-free instead. The deferral caps at $24,500 for 2026, the age-50 catch-up adds $8,000, the SECURE 2.0 enhanced catch-up applies from 60 to 63, and deferrals plus employer contributions together cap at $72,000 under the annual additions rule.

The stacking rules are where 403(b)s surprise people. A public-school employee can defer $24,500 into a 403(b) and another $24,500 into a 457(b) in the same year, because the limits live in separate code sections; that is $49,000 of pre-tax room on a teacher's salary. The 15-year catch-up adds up to $3,000 more per year, with a $15,000 lifetime cap, for employees with fifteen years of service at the same school, hospital, or church. None of this changes what the money does in the market; it changes how much can go in and what the wrapper costs to exit.

The plan matters for one reason: it is often the only tax-advantaged account a nurse, teacher, or hospital worker has, and the fee spread inside 403(b) vendor menus is wider than almost anywhere else in personal finance. The same index fund that costs 0.04% in a direct-sold menu can sit next to an annuity charging 1.3% in annual expenses plus surrender charges that lock the money for years. On a $150,000 balance, that spread is roughly $1,900 a year, compounding.

I watched a colleague named Brent (yes, that Brent) pick his 403(b) vendor at orientation because the annuity salesman showed up with cookies. He spent eleven years paying 1.35% in annual fees and surrender charges before a coworker showed him the district's direct-sold index menu at 0.08%. On his $130,000 balance, the difference was roughly $1,650 a year, every year, for eleven years.

The highest-leverage thing most 403(b) participants can do is read the vendor list before the orientation does the choosing: direct-sold index menus are common in public schools now, and picking the cheap one takes an afternoon. Price the retirement with the retirement account calculator and audit the fee with the investment fee comparison.