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403(b) retirement plans are offered by schools and tax-exempt charitable organizations. Like 401(k) plans, 403(b) plans allow participants to set aside money for retirement as well as receive contributions from employers. Here’s what else you should know about 403(b) retirement plans and how much you can contribute in 2024 and 2025.
What is a 403(b) retirement plan?
A 403(b) is the type of retirement plan offered by non-profit and other tax-exempt organizations. If you’re a teacher, professor, nurse or doctor, you may have a 403(b) plan. These plans function in the same way that their more popular counterparts such as a 401(k) plan do. Employers and employees can both make contributions to employees’ retirement plans.
Like other retirement plans, 403(b) plans come with tax advantages. You can set aside money on a pre-tax basis into your 403(b) plan, where it can be invested and grow tax-deferred until you start making withdrawals during retirement. There are also Roth 403(b) plans that allow you to contribute after-tax dollars, which makes your retirement withdrawals tax-free.
In general, if you make a withdrawal prior to reaching age 59 ½, you’ll pay a 10 percent penalty, though there are some exceptions.
403(b) contribution limits in 2023 and 2024
Contribution limits for 403(b)s and other retirement plans can change from year to year and are adjusted for inflation. Here are the limits for 2023 and 2024.
| 403(b) plan limits | 2024 | 2025 | Change |
|---|---|---|---|
| Maximum salary deferral for workers | $23,000 | $23,500 | +$500 |
| Catch-up contributions for workers 50 and older* | $7,500 | $7,500 | +$0 |
| Total contribution limit | $69,000 | $70,000 | +$1,000 |
| Total contribution limit, plus catch-up contribution | $76,500 | $77,500 | +$1,000 |
What is the 15-year rule for 403(b) plans?
Long-term employees may have the opportunity to save even more through 403(b) plans. Regardless of age, employees with at least 15 years of service with the same employer, and an average annual contribution of less than $5,000 per year, may be permitted to defer an extra $3,000 per year over and above normal IRS deferral limits (up to a lifetime limit of $15,000 for this type of catch-up contribution). Be aware that not all employers offer catch-up contributions based on the 15-year rule.
Employees who qualify may be able to defer up to $26,000 in 2024 or $26,500 in 2025. Check with your employer to see if catch-up contributions based on the 15-year rule are available to you.
How to maximize your 403(b)
1. Start contributing now
One of the best ways to get the most out of any retirement plan is to start contributing as soon as you can. Time is your friend when it comes to investing because the money you contribute today will have longer to compound and grow. You’ll have a significant advantage if you start contributing to your retirement plan in your 20s versus starting in your 30s or 40s.
2. Take advantage of any employer match
Many employers offer to match a portion of employee contributions to 403(b) plans and it’s critical that you receive this matching contribution if you want to maximize your retirement savings. The exact amount of the match will vary from employer to employer, but you may receive a match of 100 percent on your first two percent of contributions and 50 percent on the next three percent of contributions, for example. Experts and financial advisors say this match is almost like free money, so you’ll want to contribute at least enough to receive the full employer match.
3. Align your investments with your goals
Some people make the mistake of thinking that your work is done once you’ve made the contributions, but the money will only grow if it’s invested in assets such as stocks, bonds or funds that hold these securities. Allocating a larger percentage of your portfolio toward stocks makes sense when your goals (retirement) are still far off. Stocks generally offer the highest returns, but can be quite volatile in the short-term.
As you get closer to retirement, you’ll want to think about positioning your portfolio more toward bonds or other fixed-income securities that typically come with less risk than stocks. Fixed-income investments also help generate income for your portfolio at a time when you may be exiting the workforce.
4. Periodic rebalancing
The investments you hold in your portfolio will grow at different rates and cause your portfolio allocations to shift from the desired levels. You may want to set aside time each quarter to review your portfolio and determine whether rebalancing to your desired allocation makes sense. For example, if you want to hold 50 percent of your portfolio in stocks and 50 percent in bonds, you may end up with 60 percent in stocks and 40 percent in bonds if stocks outperform bonds over time. Adjusting your portfolio through rebalancing is a way to manage your portfolio’s risk.
5. Avoid early withdrawals
One of the worst things investors can do to their portfolios is to make an early withdrawal before reaching retirement age. You’ll likely have to pay taxes on the withdrawal along with a 10 percent penalty unless you meet the requirements for an exception. The money you withdraw will also miss out on compounding over the long-term in a tax-advantaged way. There are times when you may have no other choice, but early withdrawals should be avoided if at all possible.
Bottom line
A 403(b) retirement plan is the type of retirement plan offered by schools, nonprofits and other tax-exempt organizations. These plans function similarly to 401(k) plans and allow employees to save for retirement in a tax-advantaged way. Employees can contribute up to $23,000 to a 403(b) plan in 2024, or $30,500 if they are age 50 or older. These limits rise to $23,000 and $31,000, respectively, in 2025.
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