403(b) retirement plans

A 403(b) is a tax-advantaged retirement plan similar to a 401(k) plan, but designed for employees of school systems, nonprofit hospitals, religious organizations and other tax-exempt employers, known as 501(c)(3) organizations.

Here are the basics of 403(b) plans, although plan rules may vary:

Participants may be able to make pretax or Roth contributions. Some organizations match these contributions.

Participant contributions are 100% immediately vested, but employer (e.g., matching) contributions may be subjected to a vesting schedule.

Eligible organizations


Public education organizations, including primary and secondary schools, state colleges and universities, and junior colleges

Nonprofit organizations, including hospitals, religious organizations, charitable institutions and social welfare agencies

Eligible employees


After the first employee is permitted to participate, the employer must extend the offer to participate to all employees of the organization. The employer may exclude certain employees from the plan:

  • Employees who will contribute $200 or less annually
  • Nonresident aliens
  • Employees who work less than 20 hours per week
  • Employees who participate in a 401(k) or 457(b) plan or in another 403(b) plan
  • Students performing services described in Code 3121(b)(10)

Participant contributions


Each employee participating in the plan determines how much money is to be automatically contributed from each paycheck. Generally, participants can invest an annual maximum of $23,000 in 2024 or $30,500 for those 50 or older.

Traditional contributions are made before taxes are deducted, which means that income taxes are not paid at the time of investment. Instead, taxes on both contributions and earnings are paid when the money is withdrawn.

Plans may allow Roth contributions, which are made with money that has been taxed. Money that’s been taxed won’t be taxed again. Additionally, earnings are tax- and penalty-free for qualified distributions.*

* Withdrawals from Roth accounts are tax- and penalty-free if the account was established at least five years before, and if the participant is at least 59½ years old, disabled or deceased. For nonqualified distributions, earnings are taxable and may be subject to a 10% early withdrawal penalty.

Employer contributions


As an added incentive for their employees to invest, some employers make matching contributions to participant accounts. Some employers match employee contributions dollar for dollar, while others contribute a percentage of what employees contribute. Employers may also make discretionary (profit-sharing) contributions into participant accounts.



Participants always own 100% of their contributions. With employer contributions, participants often become vested over time.



Distributions from 403(b) plans are generally allowed at age 59½, or if the employee becomes disabled or leaves the employer sponsoring the plan (penalties may apply for early cash-out distributions). However, there may be ways to access money early.

Options when employment ends


There are a number of options an employee can take when leaving the job:

  • Roll over to an IRA — Rolling 403(b) assets to an IRA can allow participants to keep the same tax benefits, avoid penalties, choose from a wide range of investment options and, with a Roth IRA, avoid having to take distributions before they’re needed.
  • Stay in the old plan — Participants may be able to remain in the plan and keep the same benefits, although fees may increase and they won’t be able to make contributions.
  • Move to a new plan — If the participant’s new employer accepts rollovers, participants can keep the tax benefits while consolidating their retirement plan money.
  • Cash out — Participants will owe applicable taxes and, if not yet age 59½ (unless an exception applies), an additional 10% early distribution tax. However, cashing out does give you cash in hand, which may make sense if you need money to take care of current needs.

Set up a plan

Call your financial professional to establish a plan with Capital Group today. Don’t have a financial professional?

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Investment options

The investments available in the plan — the most common options are mutual funds — are generally determined by the employer or the plan provisions, but participants can decide which of the options to use.

American Funds® offers a wide range of investments.

American Funds Target Date Retirement Series®

Select a target date fund that is based on your nearest anticipated retirement date. A single investment provides a fund-of-funds portfolio of actively managed American Funds aligned with an investor’s time horizon.

Individual mutual funds

Investors can build an investment portfolio of mutual funds (excluding tax-exempt funds) to meet their specific preferences and needs.

Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing.

Although the target date portfolios are managed for investors on a projected retirement date time frame, the allocation strategy does not guarantee that investors' retirement goals will be met. Investment professionals manage the portfolio, moving it from a more growth-oriented strategy to a more income-oriented focus as the target date gets closer. The target date is the year that corresponds roughly to the year in which an investor is assumed to retire and begin taking withdrawals. Investment professionals continue to manage each portfolio for approximately 30 years after it reaches its target date.

This material does not constitute legal or tax advice. Investors should consult with their legal or tax advisors.

All Capital Group trademarks mentioned are owned by The Capital Group Companies, Inc., an affiliated company or fund. All other company and product names mentioned are the property of their respective companies.

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American Funds Distributors, Inc.

This content, developed by Capital Group, home of American Funds, should not be used as a primary basis for investment decisions and is not intended to serve as impartial investment or fiduciary advice.