403(b) Retirement Plans

403(b) plans are similar to 401(k) plans but are reserved for employees of tax-exempt nonprofit organizations, such as public schools, hospitals, foundations, charities, and churches and other religious organizations. Like 401(k)s, 403(b)s allow you to set up tax-deferred accounts and invest in mutual funds, stocks, bonds and various other investments.

There are two major differences between 403(b) plans and 401(k) plans:

All of the major features of 403(b) plans—tax benefits, eligibility, vesting, contribution limits, and so on—mirror those of 401(k) plans. Moreover, 403(b)s work the same way as 401(k) plans: you invest pretax dollars, and the assets in the account grow tax deferred. Or, under the Roth 403(b) variation, you invest after tax dollars that grow tax deferred and are tax free upon withdrawal.

The one unique trait of 403(b)s is a “catch-up” provision available only to employees with 15 or more years of service with a qualified organization and who have averaged contributions of less than $5,000 per year. If you qualify, this provision increases your contribution limit by up to $3,000 per year, up to a total lifetime catch-up limit of $15,000. If you’re over age 50, you can combine this catch-up provision with the more universal $5,000 per year catch-up contribution, which would enable you to contribute a total of up to $23,000 annually to your 403(b) plan.