403(b) is an internal Revenue Code for Defined Contribution Retirement Plan for government agencies and tax-exempt organizations, such as: schools, colleges, universities, hospitals, charities, and churches, etc.

The definition from IRS’ website is listed below:

“A 403(b) plan (also called a tax-sheltered annuity or TSA plan) is a retirement plan offered by public schools and certain 501(c)(3) tax-exempt organizations. Employees save for retirement by contributing to individual accounts. Employers can also contribute to employees’ accounts.”



Let’s take a closer look at what the definition means:

  • “Tax exempt” means Federal income tax exempt.
  • The employer’s contribution to employees’ accounts is commonly called the “company match”. Employers usually can choose dollar-for-dollar match up to certain percentage of employees’
  • Assets in a 403(b) plan can be placed in any of the following investment types:
      • an annuity contract provided through an insurance
      • a custodial account invested in mutual funds; or
      • a retirement income account set up for church ”

403(b) Plans operate very similar to their counterpart, 401k Plans. Employees make voluntary pre-tax salary deferrals to their individual 403(b) plan accounts and invest tax deferred until they reach age 59 1/2 when the money can be withdrawn penalty free, although income taxes are assessed then.

Although some plans might offer an “In Service” provision (with or without penalty imposed by IRS) provided that employees work for a certain number of years; nonetheless, be aware of the conditions mentioned above also written “Spousal Consent” is required for most of the plans at present time.

Certain exceptions are allowed with an early withdrawal, for example:

  • Medical expenses (not a loan; therefore, you don’t have to pay it back and income taxes are due on tax time, but penalties are waived).
  • Direct rollover to one’s IRA account (if it’s trustee to trustee transfer, income tax withholding is not required).
  • Also, if a loan provision is built in, employees can borrow against his/her own account as well and pay himself/herself back to the account with interest.

Words of Caution: taking the money out means less of a company match and if it is not transferred to an IRA account means less money saved up for retirement. Just words of caution for what it’s worth.

What are the differences between 403(b) plans and 401k plans?  403(b) plans usually don’t offer as many investment options as 401k plans but have a shorter vesting schedule – in other words, the employees could receive employer’s matches for their contribution sooner.

Speaking of investment options, that is one of the common reasons for rolling over to an IRA account as the IRA account has stocks, mutual funds, bonds, ETFs, etc. to choose from.

In addition, if the organization offers a “ROTH 401k” option, employees can make their “after-tax” contribution to their own designated Roth 401k accounts and benefit from Roth features (please see my other web page titled, “Backdoor Roth IRA” for more information).

There are some disadvantages of 403(b) Plans to keep in mind:

  1. 403(b)s are exempt from non-discrimination testing. Discrimination testing is designed to prevent management-level or highly compensated employees from receiving a disproportionate amount of benefits from a given plan. Since 403(b)s are exempt from non-discrimination testing, they don’t have to follow ERISA standards to ensure plan
  1. And since 403(b)s don’t have to comply with ERISA rules, the plans do not have the same level of protection from creditors as 401k plans do. If you are concerned with the possibility of creditors pursuing your assets,

I highly recommend you seek the counsel of a local attorney who is experienced with your state laws.

In summary, you should participate in the 403(b) plans offered at work to save for your retirement and take the match portion, if your employers offer that free money! Subsequently, when the time comes, you could consider the in-service withdrawal, or rolling over all that good stuff.

If this article seems overwhelming, you do not have to work alone – consult your trusted advisors. If you don’t have one, I would be delighted to start a conversation at a mutual convenient time!

Princeton Forrestal Village
116 Village Blvd, Suite 200
Princeton, NEW JERSEY 08540
Phone: (609) 910-2600


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