The term 403(b) plan refers to a retirement account designed for certain employees of public schools and other tax-exempt organizations. Participants may include teachers, school administrators, professors, government employees, nurses, doctors, and librarians.

The 403(b) plan, which is closely related to the better-known 401(k) plan, allows participants to save money for retirement through payroll deductions while enjoying certain tax benefits. There's also an option for the employer to match part of the employee's contribution.

• 403(b)s are retirement savings plans that serve employees of public schools and tax-exempt organizations.

• Contributions to 403(b) plans are made through payroll deductions.

• The IRS limits the amount that employees can contribute to their 403(b) plans.1

• The advantages of a 403(b) include faster vesting of funds and the ability to make additional catch-up contributions.

• Investment choices may be more limited with a 403(b) and some accounts offer less protection from creditors than 401(k)s.

As noted above, individuals employed by schools and other tax-exempt organizations can save for retirement by contributing to a 403(b) plan through payroll deductions. The plan is akin to the 401(k) plan used by private-sector employees. Participants can include:

• Employees of public schools, state colleges, and universities

• Public school employees of Indian tribal governments

• Church employees

• Employees of tax-exempt 501(c)(3) organizations

• Ministers and clergy members2

The 403(b) plan has the same caps on yearly contributions that come with 401(k) plans. The maximum contributions allowed are $19,500 and $20,500 for the 2021 and 2022 tax years. The plan also offers $6,500 catch-up contributions for those age 50 and older.3 Combined employee and employer contributions are limited to the lesser of $58,000 in 2021 and $61,000 in 2022 or 100% of the employee's most recent yearly salary.1

Participants must reach age 59½ before withdrawing funds or get slapped with an early withdrawal penalty.4 

If your employer offers a 403(b) and a 401(k) you can contribute to both but your aggregate contribution cannot be more than the annual limit ($19,500 in 2021 and $20,500 in 2022)—not counting any catch-up contributions.5

Although it is not very common, your job situation could end up giving you access to both a 401(k) and a 403(b) plan. Each offers employees a tax-advantaged way to save for retirement, but investment choices are often more limited in a 403(b) plan than a 401(k). And remember, 401(k)s serve private-sector employees.

But unlike a 401(k), the 403(b) plan also offers a special plan for those with 15 or more years of service with the same employer (see below).