A 403(b) is a workplace retirement plan for employees of public schools, churches, and other tax-exempt organizations like nonprofit hospitals and charities. It works much like a 401(k). You contribute from your paycheck before taxes and pay tax when you withdraw in retirement, and many plans offer a Roth option too. It’s also called a “tax-sheltered annuity,” but a 403(b) doesn’t have to hold an annuity. Many plans invest in mutual funds instead. Don’t work for a nonprofit? Learn more about annuities and how to invest in them in a tax-advantaged way.
History Of the 403(b) and Tax Sheltered Annuities
The precursor to the 403(b) plan was simply a tax-exempt employer (usually a school) putting money aside into an annuity contract for an employee. These contracts were typically individual annuities, owned by the employees. In essence, they were fully portable pensions.
In 1958, section 403(b) of the Internal Revenue Code was put in place to limit the amount that could be contributed to such annuities. At the time, the only investment options available for 403(b) participants were insurance-based annuity products. Thus, the names 403(b) plan and tax-sheltered annuity became synonymous.
In 1974, Congress added paragraph 7 to section 403(b) of the Internal Revenue Code, which allowed participants to invest directly into mutual funds in addition to annuities.
So while the name tax-sheltered annuity lingers, it’s a bit of a misnomer.
403(b) Plans Today
403(b) plans are similar to 401(k)s in that they allow employees at eligible institutions to make pre-tax contributions into a retirement plan. Contributions to the plan are not taxed until the employee starts taking distributions in retirement. Employers can also make contributions to the plan, so the employee gains the benefit of having additional tax-free funds invested.
403(b) Contribution Limits
Like a 401(k), elective deferrals to 403(b) plans are limited. Under the IRS limits for 2026, you can contribute up to $24,500 from your salary. If you’re 50 or older by the end of the year, you can add a catch-up contribution of $8,000. If you turn 60, 61, 62, or 63 in 2026, your catch-up rises to $11,250.
The limit on annual additions covers everything that goes into your 403(b) accounts, from both you and your employer. For 2026, it’s $72,000 or 100% of your includible compensation for your most recent year of service, whichever is less. Some plans allow additional catch-up contributions of up to $3,000 a year for employees with at least 15 years of service with the same employer. If you earned more than $150,000 in FICA wages in 2025, any catch-up contributions you make in 2026 must go in as Roth.
How to Choose Your 403(b) Investments
The main difference between a 401(k) and a 403(b) is the menu of investments. A 401(k) can offer a wider range, including mutual funds, exchange-traded funds, collective investment trusts, and sometimes individual securities. Under current law, a 403(b) can invest only in mutual funds and annuities. In December 2025, the House passed the INVEST Act, which would let 403(b) plans offer collective investment trusts too. The Senate hasn’t acted on its version yet.
A 403(b) gives you fewer investment options. Research shows that too many choices can be paralyzing, though, so the shorter menu may work in your favor.
You basically have two options:
- Mutual Funds
- Annuities
Annuities typically come in two forms: fixed or variable annuities. A fixed annuity offers a guaranteed payout, similar to a pension. A variable annuity functions more like a mutual fund. Your income in retirement depends on how well the investments in the annuity have performed.
Whether an annuity is fixed or variable, one trait stays the same: in most cases, annuity fees are higher than those of other investment products. The returns can be more stable, though. Lifetime annuities, for example, guarantee income for as long as you or your spouse live.
When selecting how to invest your money, consider fees, annual charges associated with the investment, investment returns, the types of mutual fund and the types of annuities. You may also want to understand the cashing out policies.
403(b) Plans as Part Of Your Overall Retirement Planning
Your 403(b) plan is an important part of your retirement plan, but it is probably not everything. Retirement planning involves many different elements that must all fit together. You need to figure out when to retire, whether or not you are eligible for Social Security and when to start that benefit, how much income will you need to support your desired lifestyle and much more.
One of the easiest ways to get your hands around your overall retirement plan is to use a reliable retirement calculator. The trick is to make sure you find one that includes the ability to document pensions and variable start dates for different benefits and income sources.
The Boldin retirement calculator lets you add pensions and set a different start date for each benefit and income source. The American Association of Individual Investors (AAII) has named it a best retirement calculator.
Conclusion
A 403(b) is not always an annuity contract, even though it’s often called a tax-sheltered annuity. It offers the flexibility to invest in mutual funds or annuities, depending on your plan. This means a 403(b) may work much like a 401(k), but it’s tailored for employees of public schools and certain nonprofits. Understanding this distinction helps you choose the right investments for your retirement goals and avoid surprises when accessing your savings.
FAQs: Is a 403(b) an Annuity?
Q: Is a 403 b annuity the same as a 403(b) plan?
A: The 403(b) plan may be set up as an annuity, but it can also be a mutual fund account or a mix of both. It isn’t automatically an annuity incorporated contract.
Q: What are tax-sheltered annuities?
A: Tax-sheltered annuities, or TSAs, are another name for 403(b) plans. They let you save for retirement with tax benefits while working in schools or nonprofits.
Q: Does that mean a 403(b) equals an annuity by default?
A: No. While the term “annuity” appears in its name, many 403(b) plans are structured as custodial accounts with mutual funds, not traditional annuities.
Q: What does it mean to have a tax-sheltered annuity?
A: It means your retirement contributions grow on a tax-deferred basis, and you only pay income taxes when you withdraw the money in retirement.
