What exactly is a 403(b) plan?
You could say that the 403(b) plan is a close relative of the more familiar 401(k) retirement savings plan. Both plan types offer tax-deferred growth. The major difference is the types of businesses that offer them.
- 401(k) plans are generally available to employees of for-profit companies.
- 403(b) plans are generally offered by public education institutions and certain tax-exempt organizations.
Saving in a 403(b) plan is a smart thing to do
A 403(b) plan can be an excellent way to help build retirement security—whether it's your only option for retirement saving, or it's supplementing another retirement account.
You're in control. You choose where your money goes and how much you'll contribute ($22,500 for 2023). You'll also have options for how to withdraw your money in retirement.
And if your employer contributes to your plan, your savings get an extra boost!
A type of employer-sponsored retirement savings plan that allows employees to contribute pre-tax dollars by deferring salary. Many plans offer a variety of investment options, and employers often match a percentage of employee contributions.
Delaying the payment of income taxes on income. For example, owners of traditional IRAs do not pay income taxes on the interest, dividends, or capital gains accumulating in their retirement accounts until they begin making withdrawals.
Money placed in a retirement plan, such as a 403(b), IRA (individual retirement account), 401(k), or other retirement plan for a particular tax year. Contributions may be deductible or nondeductible, depending on the account type.
The strategy of investing in multiple asset classes (like stocks, bonds, and cash) and among many securities in an attempt to lower overall investment risk.
A feature of a 403(b) plan that allows you to make after-tax contributions (so you don't get an immediate tax deduction) and then withdraw money in retirement tax-free as long as you meet the requirements.
An addition to an account made with funds from an employee's paycheck before federal income taxes are deducted.
The investment returns you accumulate on the savings in your account.
When earnings on invested money generate their own earnings. For example, if you invested $5,000 and earned 6% a year, in the first year you'd earn $300 ($5,000 x 0.06), in the second year you'd earn $318 ($5,300 x 0.06), in the third year you'd earn $337.08 ($5,618 x 0.06), and so on. Over longer periods of time, compounding becomes very powerful. In this example, you'd earn over $1,600 in the 30th year.
Income you can receive by investing in bonds or cash investments. The investment's interest rate is specified when the investment is issued.
The distribution of the interest or income produced by a mutual fund's holdings to the fund's shareholders, or a payment of cash or stock from a company's earnings to each stockholder. Dividends can be distributed monthly, quarterly, semiannually, or annually.
Payments to mutual fund shareholders of gains realized during the year on securities that a fund has sold at a profit minus any realized losses. Capital gains can be distributed monthly, quarterly, semiannually, or annually.
A type of investment that pools shareholder money and invests it in a variety of securities. Each investor owns shares of the fund and can buy or sell these shares at any time. Mutual funds are typically more diversified, low-cost, and convenient than investing in individual securities, and they're professionally managed.
Recommended to read next
Why choose Vanguard?
Our track record of reliable 403(b) plan management; high-quality, low-cost mutual funds; and convenient account services makes Vanguard the smart choice for employers who want to help employees save for retirement and for employees seeking a trustworthy partner to help them reach their goals.
*Withdrawals taken before age 59½ may be subject to ordinary income tax plus a 10% federal penalty tax.
**Retirement plan recordkeeping and administrative services are provided by The Vanguard Group, Inc. (VGI). VGI has entered into an agreement with Newport Group, Inc., to provide certain plan recordkeeping and administrative services on its behalf. Custodial services are provided by Newport Trust Company, a wholly owned subsidiary of Newport Group, Inc. Newport Group, Inc., and Newport Trust Company are not affiliated with The Vanguard Group, Inc., or any of its affiliates.
All investing is subject to risk, including the possible loss of the money you invest.
Diversiﬁcation does not ensure a proﬁt or protect against a loss in a declining market.
For more information about Vanguard funds or ETFs, visit vanguard.com to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.