403(b) vs 401(k): What Teachers and Nonprofits Should Know

What Is a 403(b) Plan?

A 403(b) (named after the IRS code section) is a retirement plan for:

• Public school teachers (K–12).
• Nonprofit organization employees (nonprofits, charities, foundations).
• Some government employees (varies by state/locality).

Functionally, a 403(b) is nearly identical to a 401(k):

• Contributions reduce current taxable income.
• Growth is tax-deferred.
• Withdrawals at 59.5+ are taxed as ordinary income.
• Early withdrawal (before 59.5) incurs a 10% penalty (with exceptions).

2026 403(b) Contribution Limits

These are identical to 401(k) limits. The 60–63 band is the piece most districts have not communicated well: SECURE 2.0 raised the catch-up to $11,250 for exactly four years, then it drops back to $8,000 at 64. If you are 60, 61, 62 or 63 in 2026, this is the highest deferral you will ever be allowed.

The Roth catch-up rule starts biting in 2026. If your prior-year FICA wages from the employer sponsoring the plan exceeded $150,000, your catch-up contributions must go in as Roth — you don't get the deduction. There is a wrinkle that matters enormously to public school employees: the rule keys off Social Security (FICA) wages from that employer. Teachers in the states where public school employment is not covered by Social Security have no FICA wages from the district at all, so the mandate does not reach them. Ask your payroll office whether your position is Social Security-covered before assuming either way.

Additional catch-up for long-serving employees: Employees of a qualified organisation — public schools, hospitals, home health agencies, health and welfare service agencies, and churches — with 15+ years of service with that same employer may be eligible for an extra $3,000/year. This is unique to 403(b)s, and it is not automatic. The annual amount is the least of three tests:

1. $3,000, or
2. $15,000 minus every service catch-up you have already used, or
3. $5,000 × your years of service, minus all elective deferrals you have ever made to that employer's plans

Test 3 is the one that disqualifies people. A teacher who has been deferring $15,000 a year for 15 years has $225,000 of prior deferrals against a $75,000 allowance and gets nothing. The service catch-up is designed for people who saved little early on, not for consistent maximisers.

Example: Teacher age 45, 20 years of service, who only started contributing five years ago and has deferred $60,000 lifetime.

• Test 3 allowance: $5,000 × 20 = $100,000, minus $60,000 deferred = $40,000 of room
• So the limit is the lesser $3,000
• Employee deferral: $24,500 + service catch-up $3,000 = $27,500, seven years before the age-50 catch-up is even available

403(b) vs. 401(k): Key Differences

Investment Options in 403(b)

Historically, 403(b)s offered primarily annuities (insurance products). Annuities provide guaranteed income but have high fees (1%–3% annually).

Modern 403(b)s increasingly offer mutual funds and ETFs, which have lower fees (0.2%–0.5%).

Recommendation: If your district offers low-cost mutual fund or ETF options, prioritize those over annuities. Over 30 years, a 1% fee difference compounds significantly.

Example: $500,000 portfolio, 30 years of growth, 7% gross return before fees.

• Annuity (2% fee, so 5.0% net): Grows to $2,161,000.
• Low-cost fund (0.3% fee, so 6.7% net): Grows to $3,499,000.
• Difference: $1,338,000 (expense drag over time).

That gap is larger than the entire balance you started with. Run your own vendor's expense ratio against a low-cost alternative in the compound interest calculator — the number is usually bigger than teachers expect, because fee drag compounds in exactly the same way returns do.

Advocate with your district to offer low-cost index funds. Most 403(b) vendor lists are long, opaque, and dominated by insurance products for a structural reason: unlike 401(k)s, non-ERISA governmental 403(b) plans have no plan fiduciary policing the menu. Check the actual expense ratio on your fund, and separately, whether the annuity carries a surrender charge — many run 5–7 years on each contribution, which can make "just switch vendors" expensive for recent money.

Employer Matching in 403(b)

Many school districts and nonprofit employers offer employer matches:

• Common match: 3–5% of salary.
• Vesting: Immediate or 3–5 years.

Always contribute at least enough to claim the full match. It's free money.

Example: Teacher earning $65,000, employer offers 3% match.

• You contribute 3% ($1,950), employer matches ($1,950).
• Combined: $3,900 to 403(b) for just your $1,950 contribution.
• Return: 100%.

Match formulas are rarely as simple as "3%" — some districts match 50 cents on the dollar up to 6% of pay, some cap in dollars, some require a minimum service period each year. Put your district's actual formula into the employer match calculator to find the contribution rate that captures every available dollar, since contributing above it earns no additional match and contributing below it forfeits real money.

Pensions and 403(b) Coordination

Many school districts offer defined benefit pensions to teachers. The pension is separate from the 403(b).

Pensions provide a fixed monthly income in retirement (e.g., $2,500/month for a 30-year teacher).

Impact on retirement planning:

• A pension reduces how much you need to save in the 403(b).
• But 403(b) matches still reduce taxes, so contribute at least the match amount.

Example: Teacher with 30-year pension ($2,500/month = $30,000/year).

• Annual spending in retirement: $50,000.
• Pension covers: $30,000.
• Gap from 403(b) withdrawals: $20,000.
• 403(b) needed (4% rule): $500,000.

Without a pension, the same teacher would need $1,250,000 in the 403(b). The pension is doing $750,000 of work.

Pension coordination: Contribute to the 403(b) but don't feel pressured to save as aggressively as non-pension employees. The number that actually matters is the gap between your pension and your spending, not a generic savings-rate rule — project the pension itself with the teacher pension calculator, then size the 403(b) that has to cover the difference with the retirement calculator.

Two cautions before you lean on the pension too hard. Most teacher pensions have weak or no cost-of-living adjustment, so a $30,000 pension is worth roughly $30,000 in year one and materially less at 85. And most systems require long tenure to vest at full value — leaving at year 8 of a 10-year vesting schedule can mean walking away with a refund of your own contributions and nothing else.

Vesting Schedules

Your own deferrals are always 100% yours. Vesting only ever applies to employer contributions, and it comes in two shapes:

• Immediate vesting: the match is yours the day it lands. Common in public school districts.
• Cliff vesting: 0% until you hit the service requirement, then 100% at once. A 3-year cliff means leaving at 2 years and 11 months forfeits everything.
• Graded vesting: a percentage each year. A four-year graded schedule might run 0% / 33% / 66% / 100%.

If you leave before vesting, you lose the unvested portion.

Example: four-year graded schedule, employer matches $2,000/year.

• Year 1: $2,000 match, but 0% vested ($0 yours).
• Year 2: $4,000 total (current + prior), 33% vested ($1,320 yours).
• Year 3: $6,000 total, 66% vested ($3,960 yours).
• Year 4 (if you stay): $8,000 total, 100% vested (all yours).

If you leave after year 2, you keep $1,320 and forfeit $2,680.

One structural difference from 401(k)s: ERISA's maximum vesting schedules — 3-year cliff or 6-year graded — apply to 403(b)s sponsored by nonprofits, but governmental plans, including most public school 403(b)s, are exempt from ERISA and can set their own schedules. Read your plan document rather than assuming the federal caps apply.

For teachers planning to stay until retirement, vesting matters little. For anyone weighing a move between districts, find out your vesting date before you resign — a departure timed three months later can be worth thousands.

Rollovers and Direct Transfers

You can roll a 403(b) to:

• Another 403(b) plan (changing employers).
• A traditional IRA (preserving tax-deferral).
• A traditional 401(k) (if rolling to a for-profit employer's plan).

Why roll?: Lower fees, better investment options, simplified account management.

Example: Teacher leaving district A for district B, with a $250,000 403(b) balance in high-fee annuities.

• Option 1: Leave it in the old 403(b) (paying 2% annual fees = $5,000/year).
• Option 2: Roll to a traditional IRA at a low-cost provider like Fidelity (paying 0.3% fees = $750/year).
• Annual savings: $4,250.

Rolling to an IRA is often beneficial if the IRA offers lower-cost investments.

Catch-Up for Long-Service Educators (15+ Years)

Teachers with 15+ years of service can make an additional $3,000 catch-up contribution (lifetime max $15,000).

Example: Teacher age 50 with 20 years of service.

• Standard deferral: $24,500
• Age 50+ catch-up: $8,000
• Long-service catch-up: $3,000
• Total: $35,500

This is available for a limited time (until the $15,000 lifetime max is reached), so eligible teachers should take advantage.

Loan Options in 403(b)

Some 403(b) plans allow loans against your balance:

• Borrow up to 50% of balance or $50,000, whichever is less.
• Repay over 5 years with interest (typically prime rate + 1%).
• Failure to repay triggers a taxable distribution and 10% penalty.

When to borrow: Down payment on a home, emergency, or business investment.

Risks: Loan reduces retirement savings and can be costly if you leave the employer (outstanding balance may be due immediately).

Roth 403(b) Option

Some employers offer Roth 403(b)s (in addition to traditional):

• Contributions are after-tax (no deduction).
• Growth is tax-free.
• Withdrawals in retirement are tax-free.

For younger teachers (many years to retirement), a Roth 403(b) is attractive for tax-free growth.

Optimal strategy: Contribute enough to the traditional 403(b) to capture the full employer match, then direct the rest to the Roth 403(b) if it's offered.

One 2026 update worth knowing: SECURE 2.0 §604 allows employers to make matching contributions as Roth if the plan permits and the employee elects it. Historically all employer money had to be pre-tax. If your district has adopted the option, a Roth match is taxable to you in the year it's made, so it raises this year's W-2 income — check whether your withholding covers it before electing.

Note also that a Roth 403(b) is a plan account, not a Roth IRA. It is subject to the plan's rules, and its five-year clock is separate from any Roth IRA clock you already have. Rolling it to a Roth IRA at separation is usually the right move for exactly that reason.

SIMPLE IRA for Small Nonprofits

Some small nonprofit employers use SIMPLE IRAs instead of 403(b)s:

• Contribution limit: $17,000 employee deferral in 2026.
• Catch-up (age 50+): $4,000. Ages 60–63: $5,250.
• Lower administrative cost than 403(b).

If your nonprofit uses a SIMPLE IRA, the ceiling is $7,500 lower than a 403(b) at every age, so consider supplementing with a personal IRA — $7,500, or $8,600 at 50+ — or a backdoor Roth if your income is above the $153,000 single / $242,000 joint phase-out.

Teacher Retirement Taxation and State Considerations

Federal income tax applies to traditional pension and 403(b) income everywhere. State treatment varies enormously, and it varies along two separate lines that are easy to conflate:

• Some states exempt public pension income specifically but still tax withdrawals from a 403(b) or IRA.
• A few states exempt qualified retirement income broadly — pension and 403(b) and IRA distributions alike. Illinois is the standard example: it excludes qualified retirement plan distributions from state income tax across the board.

Example: Teacher retiring with a $30,000/year pension plus $20,000 of 403(b) withdrawals.

• In a state that taxes retirement income normally: all $50,000 is in the state base.
• In a state that exempts public pensions only: the $30,000 is out, the $20,000 is taxed.
• In Illinois, which exempts qualified plan distributions generally: neither is taxed at the state level.

The practical consequence is that "my state doesn't tax pensions" is not enough information to plan a Roth-versus-traditional split. Check how your state treats 403(b) distributions specifically, and remember that the state you retire to is the one that matters — no state can tax your retirement income after you have left it.

FAQ

I'm 61. Can I really contribute $35,750 this year?

Yes. The 2026 elective deferral limit is $24,500 and the SECURE 2.0 super catch-up for ages 60 through 63 is $11,250, so $35,750 is your ceiling for exactly four years. At 64 it drops back to $32,500. If you also qualify for the 403(b) 15-year service catch-up, that $3,000 stacks on top of the age catch-up rather than replacing it — the service catch-up is applied first, then the age catch-up — for a theoretical maximum of $38,750. Very few people clear the service catch-up's third test, so check it before you plan around it.

Can I contribute to both a 403(b) and a 457(b)?

Yes, and this is the most valuable and least-known fact in public school benefits. A 403(b) and a 401(k) share one $24,500 limit under §402(g); a 457(b) has an entirely separate limit. If your district offers both, you can defer $24,500 into each — $49,000 in 2026 — plus catch-ups in each. If you are within three years of the plan's normal retirement age, the 457(b) special catch-up can double its limit to $49,000 on its own, but it does not stack with the age-50 catch-up; you use whichever is larger, not both.

My district's only 403(b) vendors are insurance companies. What can I actually do?

Three things. First, ask payroll for the full approved vendor list rather than the two names the on-campus rep gave you — the list is often longer than what's marketed. Second, check whether a low-cost provider is on it; several districts added one after being asked. Third, if the menu is genuinely bad, capture the employer match in the 403(b) and put everything above the match into a Roth IRA ($7,500, or $8,600 at 50+) where you control the fund choice entirely. A 0.03% index fund in an IRA beats a 2% annuity in a 403(b) at every contribution level once the match is banked.

Should I roll my 403(b) into an IRA when I change districts?

Usually, if the fees are high — but not automatically. Two things you give up. The rule of 55: money left in the plan of the employer you separated from at or after the year you turn 55 can be withdrawn without the 10% early-distribution penalty; roll it to an IRA and that access disappears until 59½. Clean backdoor Roth math: pre-tax IRA balances are aggregated under the pro-rata rule, so a $250,000 rollover IRA can make a future backdoor Roth largely taxable. If either applies to you, moving the money to your new employer's plan instead of an IRA keeps both advantages.

Sources

• IRS Publication 571, Tax-Sheltered Annuity Plans (403(b) Plans) — 15-year service catch-up, the three-part limit test, and qualified organisations.
• IRS Notice 2025-67 and Rev. Proc. 2025-32 — 2026 deferral, catch-up, §415(c) and compensation limits.
• SECURE 2.0 Act of 2022 §109 (ages 60–63 catch-up), §603 (Roth catch-up for high earners), §604 (Roth employer contributions).
• Internal Revenue Code §402(g)(7) (403(b) service catch-up) and §457(b)(3) (special three-year catch-up).
• Department of Labor, ERISA vesting standards and the governmental plan exemption under ERISA §4(b).