403(b) & 457

What’s 403b deduction?

If you contribute to a 403(b) plan, your contributions will be deductible from your income taxes. Find out what is a 403(b) deduction.

3 min read

A 403(b) plan is a retirement plan for employees who work in non-profit organizations, schools, charities, and other tax-exempt organizations. Examples of 403(b) participants may include teachers, nurses, doctors, school administrators, and librarians. A 403(b) plan is similar to a 401(k) plan that is available to private-sector employees.

A 403(b) tax deduction refers to the pre-tax contributions you make to a 403(b) plan. Typically, when you enroll in a 403(b) plan, your employer deducts your retirement contributions from your paycheck and deposits the funds into your plan. You won’t pay taxes on the 403(b) contributions until you withdraw money from the account.

How a 403(b) plan works

A 403(b) plan allows employees of tax-exempt organizations such as nurses, teachers, and librarians to save for retirement. Employees may also qualify for an employer’s match on their contributions. Eligible employers who are allowed to offer 403(b) plans include churches, non-profit hospitals, public schools, and 501(c)(3) charitable organizations.

If you have a 403(b) plan, you won’t pay income taxes on your plan contributions. The money will grow tax-deferred over your working years, and you will only pay income taxes on the money when you start making withdrawals in retirement.

An employer may also provide a match on an employee’s contributions up to a specific limit. For example, if the employer offers a 5% match, and you contribute 5% of your wages, it means your employer would put an equal amount in your 403(b) plan. If you contribute 7% of your wages, your employer will match your contributions up to 5%. However, if you only contribute 4% of your salary, your employer will match your contributions up to the 4% you contribute.

If you quit your job or move to another employer, you can rollover your 403(b) into an IRA account. Any contributions you made to your 403(b) plan are always 100% vested, and you can rollover this amount at any time. However, if you change jobs before you are fully vested in the employer contributions, you will lose a portion of the unvested employer's contributions.

How much can you contribute to a 403(b)?

For 2022, 403(b) participants can contribute up to $20,500 in 2022. Employees above 50 can make an additional catch-up contribution of $6,500 in 2022, hence increasing the total contributions to $27,000.

A unique benefit of a 403(b) plan is that employees who have worked with an eligible employer for at least 15 years can make an extra catch-up contribution of $3,000 per year, with a lifetime limit of $15,000. If you are above 50 and you have worked with an eligible employer for at least 15 years, you can potentially contribute up to $30,000 to a 403(b) plan for up to 5 years.

If your employer provides a 403(b) match, the combined contributions can be the lesser of $61,000, or 100% of your most recent total compensation with your employer. If you are 50 or older, the combined contribution should not exceed $67,500.

To participate in a 403(b) plan, your annual income should not exceed $305,000 in 2022.

403(b) vs. 401(k)

A 403(b) and a 401(k) are considered cousins due to their broad similarities. Both have almost similar contribution limits, and they allow pre-tax and post-tax contributions. However, certain differences set these retirement plans apart.

The main difference between a 403(b) and 401(k) plan is the type of employer. A 403(b) plan is offered by non-profits and certain government entities, while a 401(k) plan is offered by private-sector employers.

Although both retirement plans have similar contribution limits, a 403(b) includes a bonus catch-up contribution for employees with at least 15 years of service with the same employer. In this case, these employees can make an additional $3,000 contribution per year, with a lifetime limit of $15,000, which makes it possible for employees to save more money with a 403(b) than a 401(k) plan.

403(b) and 401(k) plans may also differ in plan administration. Insurance companies often administer 403(b) plans while 401(k) plans are often administered by mutual fund companies. The difference in plan administration means that 403(b) plans may predominantly offer annuities as an investment option.

403(b) vs. IRA

Although an employee can have both 403(b) and IRA at the same time, these retirement plans have certain differences that set them apart.

One of the key differences between these plans is that a 403(b) is offered by an employer while an IRA can only be opened and funded by an individual. If you have a 403(b) with your employer, your employer will make payroll contributions to your plan. However, with an IRA, you must deposit funds directly to the account every pay period.

A 403(b) also has different contributions limits than an IRA. You can contribute up to $20,500 to a 403(b) plan, and an additional $6,500 if you are above 50. Your employer may also match your 403(b) contributions. In comparison, you can contribute up to $6,000 to an IRA in 2022, and an additional $1,000 if you are above 50. Hence, a 403(b) has a significantly higher contribution limit than an IRA.