Understanding the 403(B) Plan: The Basic Details You Should Know

If you are an employee of a tax-exempt organization or government entity (an example: public schools), you qualify for the 403(b) plan. This retirement plan differs from 401(k) in many ways. If you want to understand it better, this article will tell you the basic things you need to know, including your contribution limits and withdrawal rules.

Defining the 403(b) Plan

The 403(b) plan is a tax-advantaged plan, which means it is a type of investment or savings plan that is either exempt from taxation or includes other tax benefits. Therefore, you can save a lot from this plan without many deductions, making it a great way to build a retirement fund. 

The 403(b) plan is required for all employees under the aforementioned organizations. It is also an employer-sponsored plan, which means that aside from what you pay, your employer also provides a share for this fund.

How to Contribute to Your Fund

Every retirement plan in the US has a set contribution limit. For 2021, if you are aged 49 and lower, you can pay up to $19,500 for the entire year. If you are 50 years old and older and want to catch up with your savings, you can pay up to $26,000 per year.

Employees of at least 15 years can add $3,000 more to their allotted annual contribution limit for up to five years. That means you are allowed to add up to $15,000 in total to your provided contribution limit.

How to Withdraw Your 403(b) Fund

There are two ways to enjoy your 403(b) fund: the first is by waiting until the acceptable time comes, and the second is through early withdrawal.

You qualify for the standard withdrawal if you meet any of the following requirements:

  • You are aged 59 and a half
  • You suddenly become disabled
  • You are suffering from financial hardships
  • You pass away

There are no penalties involved as you get your fund.

If you need the money but do not fall under any of the requirements mentioned, you fall under the early withdrawal category. If you decide to proceed, you can borrow your money but with a ten percent penalty on top of the money.

No penalty will be imposed if your early withdrawal is because of the following:

  • You have a medical expense that is 7.5 percent more than your adjusted gross income and is not reimbursable. 
  • You are aged 55 and up who decided to leave your employer for good.
  • You agreed to the SEPP (substantially equal periodic payments) or withdrawing money under the rule 72(t) and promising that you would pay what you owe through regular payments made over five years or until you reach the age of 59 and a half, whichever of the two comes later. 

On the other hand, if you reach the age of 72, you are required to withdraw your money, gradually or not. Otherwise, you will be subjected to a penalty. Before deciding whether you need to acquire your 403(b) fund or not, make sure that you think about your decision and its implications. Then, determine whether it is good for your financial situation or not. 


Contributing to your 403(b) is a great way to kickstart your retirement plans. What makes it better than the 401(k) is the ability to make catch-up contributions. However, you have fewer options when it comes to investment. To know where you should put your money, it is best to consult with your financial advisor. 

To know more about your government pension, refer to your retirement consultant. My State Pension has a wide network of licensed agents and registered investment advisors who focus on state employee and educator retirement planning. We can help you create the best retirement plan to help you maximize your retirement benefits and give you peace of mind. Contact us so we can help!

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If you are a K-12 educator or staff, collegiate educator or staff, municipal or state employee we can connect you with a licensed financial professional with the experience needed to help you understand your pension benefits and overall retirement plan.