403(b) plans

Learn more about this retirement savings option available to employees of 501(c)(3) organizations.

What is a 403(b) retirement plan?

403(b) plans are retirement savings plans that can only be established by a public school system or a tax-exempt organization as described in IRS code section 501(c)(3), such as nonprofit hospitals, charities or religious organizations.

Two types of 403(b) retirement plans are available:

  • ERISA (Employee Retirement Income Security Act) 403(b) plans – Most 501(c)(3) nonprofit organizations, excerpt for churches and certain qualified religious-controlled organizations, are subject to ERISA. They require an annual IRS Form 5500 filing and are subject to certain ERISA nondiscrimination testing requirements.
  • Non-ERISA 403(b) plans – The plans are salary deferral agreements between individuals and designated plan providers. Only public education institutions and governmental nonprofit organizations can offer non-ERISA plans, as they are exempt from ERISA. Churches and certain religious-controlled organizations are exempt unless they officially elect to be covered under ERISA.

Difference between 401(k) and 403(b) retirement plans

The biggest difference between 401(k) and 403(b) retirement plans comes down to your employer. While a 403(b) can only be set up through a 501(c)(3) nonprofit, a 401(k) plan can be set up by any type of business, such as a sole proprietorship, partnership, limited liability company (LLC), corporation (S or C) and tax-exempt organization.

Both 401(k) and 403(b) participants may roll over and simultaneously convert their rollover-eligible assets from their qualified retirement plan to a Roth IRA. This is commonly referred to as a "direct conversion" to a Roth IRA. 

Before 2008, 403(b) retirement plan participants were required to roll over their assets to a traditional IRA and then complete a traditional IRA to Roth IRA conversion. This multi-step process can now be completed in a single step by contacting the plan administrator or with an Edward Jones financial advisor. The participant's pretax amounts that are rolled over or converted to a Roth IRA must be included in a participant's income in the year of distribution or conversion.

401(k)s and 403(b)s also have similar contribution limits and catch-up amounts for participants older than 50.

403(b) contribution limits

As with most retirement savings accounts, contribution limits can change each year. Eligible individuals can contribute up to the lesser of 100% of earned income or the applicable limit shown below. To be eligible for a catch-up contribution, individuals must be age 50 or older by year-end.

  • Employees can make pretax salary deferrals of up to $20,500 (for 2022).

  • If you're 50 or older, you can defer upon to $27,000 (with a $6,500 catch-up contribution or 100% of compensation, whichever is less).

  • Employer contributions, in the form of matching and non-elective contributions, don't apply to every 403(b) plan. Employer contributions are limited to the lesser of 100% of compensation or $61,000 for 2022.

  • The combination of all employee and employer contributions to a 403(b) plan for 2021 can't exceed $61,000 under the age of 50 and $69,500 for ages 50 and older.

Note: If an individual participates in a 403(b) plan as an employee, and also has more than 50% ownership of a separate business that sponsors a plan, that individual is subject to a limit of $61,000 ($67,500 including age 50 catch-up) for 2022 between the 403(b) and the plan the individual's business is sponsoring.

403(b) plans and taxes 

Contributions to 403(b) plans can realize some tax benefits. For example:

  • Pretax salary deferrals are excludable from a participant's federal income tax and thus not subject to federal income tax withholding. These contributions have the potential to grow taxdeferred.
  • Some plans allow employees to make Roth (after-tax) deferrals. While these deferrals aren't excluded from federal income tax at the time of the contribution, there may be additional benefits at the time of distribution.

Taxation of distributions

Determining what's taxable when taking a distribution from an 403(b) will depend on what type of money is in the plan. Of course, eligible rollovers to an IRA are not subject to taxation. 

  • Pretax money
    Any distribution not rolled over will be taxed as ordinary income. A 10% early withdrawal penalty will apply for individuals younger than 59½, unless the individual meets a penalty exception or the Age 55 rule.
  • Roth money
    Qualified distributions of Designated Roth contributions and earnings can be taken tax-free.

After-tax money

In many qualified plans, participants can make after-tax contributions (not referring to Roth deferrals). That is, they can pay taxes now on the contribution amount and only be subject to taxes on the earnings upon withdrawal.

Required minimum distributions

Generally, individuals must begin taking a required minimum distribution (RMD) from their qualified plan in the year they turn 70½ (for individuals who attained this age in tax year 2019 or earlier) or age 72 (beginning in tax year 2020) and each subsequent year. Individuals who are still working for the employer sponsoring the plan may delay their RMDs until April 1 of the year following retirement, if they meet the following:

  • This option must be elected in the plan document.
  • The individual must own less than 5% of the business. (Those who own 5% or more of the business cannot delay RMDs.)

We can help

Our financial advisors will work closely with you to evaluate all the retirement options available to you. We invite you to meet with an Edward Jones financial advisor and get started today.

Important information:

This information is for educational purposes only. Edward Jones, its employees and financial advisors cannot provide tax or legal advice.