Are Tax-Sheltered Annuities Really Qualified? + FAQs
- November 13, 2026
- 7 min read
Yes. 403(b) tax-sheltered annuities are tax-qualified retirement plans. The Internal Revenue Service (IRS) lists the 403(b) as a "qualified retirement plan" for the 10% early-withdrawal tax, and it treats the plan as an eligible rollover plan.
There is one technical wrinkle. A 403(b) is governed by Internal Revenue Code section 403(b), not section 401(a). Section 401(a) is what the IRS means by a "qualified plan" in the narrow sense.
The mistake to avoid is treating 403(b) annuity money like a non-qualified annuity. Some savers assume only the earnings are taxed, or that no required minimum distributions (RMDs) apply. In fact, every pre-tax dollar is taxable when it comes out.
The IRS announced the 2027 limits on November 12, 2026. The 2027 deferral limit is $25,500 (2026: $24,500), the 2027 age-50 catch-up is $8,500, and the 2027 catch-up for ages 60 to 63 is $11,750.
Federal Tax Treatment of Tax-Sheltered Annuities (403(b) Plans)
A 403(b) is governed by section 403(b) of the tax code, not section 401(a). The IRS still groups it with qualified retirement plans for the early-withdrawal tax, rollovers and required minimum distributions (RMDs).
1. Who can offer a 403(b)
Only public schools, 501(c)(3) nonprofits and churches can sponsor one. Ministers can join too, even self-employed ones. A for-profit business uses a 401(k) instead.
2. How contributions are taxed
Your deferral comes out of your paycheck before federal income tax. Earn $50,000 in 2027 and defer $5,000, and you pay federal income tax on $45,000.
Social Security and Medicare (FICA) taxes still apply to the money you defer.
Many plans also take Roth contributions. Those go in after tax, and withdrawals are tax-free once you are 59½ and the account is five years old.
3. How much you can put in
The elective deferral limit is $25,500 for 2027, up from $24,500 for 2026. The IRS lists every figure in its 2027 limits announcement.
If you are 50 or older, the 2027 catch-up is $8,500 (2026: $8,000). At ages 60 to 63, the 2027 catch-up is $11,750 (2026: $11,250).
A 403(b) also has a 15-year service catch-up. With 15 years at the same employer and low past deferrals, you can add $3,000 a year for 2027, up to $15,000 over your lifetime. That amount is not indexed for inflation.
The IRS counts deferrals above the base limit toward the 15-year catch-up first, then toward the age-50 catch-up.
A new rule starts in 2027. If your 2026 FICA wages from that employer topped $155,000, your age-based catch-ups must go in as Roth.
4. Employer contributions
Some hospitals and universities match what you defer. Public schools rarely do, because they fund pensions.
Neither you nor your employer pays FICA tax on employer contributions. A $4,000 match in 2027 is not taxed until you withdraw it.
Total annual additions, yours plus your employer's, cannot pass $75,000 for 2027 (2026: $72,000), or 100% of your includible pay if that is less.
5. Tax-deferred growth
Interest, dividends and gains are not taxed while they stay in the plan.
6. Withdrawals
Traditional 403(b) withdrawals are ordinary income. You can usually take deferrals out only at 59½, after leaving the job, on disability or for a hardship.
Before 59½, a 10% additional tax applies on top of income tax. The IRS lists the exceptions to that tax, including these.
- Leaving your job in or after the year you turn 55
- Disability or death
- A court order that splits the account in a divorce
- Terminal illness, or a distribution to a domestic-abuse victim
- One emergency personal expense distribution a year, up to $1,000 for 2027
RMDs from pre-tax money start at 73 if you were born from 1951 to 1959, and at 75 if you were born in 1960 or later. If you are still working, your plan may let you wait until you retire, unless you own more than 5% of the employer.
Roth 403(b) accounts have had no lifetime RMDs since 2024.
7. Rollovers
When you leave, you can roll a 403(b) into a traditional individual retirement account (IRA) or a new employer's 401(k) or 403(b). A direct rollover is tax-free. A non-qualified annuity cannot be rolled into a 403(b).
8. ERISA and creditor protection
Most private nonprofit plans fall under the Employee Retirement Income Security Act (ERISA). Governmental and church plans do not.
If any employee can defer, nearly all must be allowed to. In ERISA plans, the employer must also act in your interest on fees and funds.
Creditors generally cannot reach 403(b) money, and no dollar cap applies. ERISA shields ERISA plans, and the Bankruptcy Code shields the rest. A dollar cap applies only to contributory IRAs.
What Changes for 403(b) Savers in 2027
Two new rules start with 2027 contributions, and the limits rise.
The Saver's Match
The Saver's Match replaces the Saver's Credit for retirement contributions. The government deposits 50% of the first $2,000 you save in 2027, so up to $1,000 per person, into your 403(b) or IRA.
The full 2027 match goes to joint filers with modified adjusted gross income (MAGI) up to $41,000 and ends at $71,000. For heads of household the range is $30,750 to $53,250. For single filers it is $20,500 to $35,500.
You claim it on Form 8880-A with your 2027 return, filed in 2028.
Roth catch-ups for higher earners
Above $155,000 of 2026 FICA wages from your employer, your 2027 age-50 and ages 60 to 63 catch-ups must be Roth. If the plan has no Roth option, you cannot make them.
Rules already in force
- Auto-enrollment: required for 403(b) plans created after December 29, 2022, except governmental and church plans.
- Long-term part-timers: ERISA 403(b)s must let you defer after two straight years of 500 or more hours.
- Collective investment trusts: still pending in Congress, not law.
The table below lists the 2026 and 2027 limits side by side.
403(b) Limits: 2026 vs. 2027
| Limit | 2026 | 2027 |
|---|---|---|
| Elective deferral | $24,500 | $25,500 |
| Age-50 catch-up | $8,000 | $8,500 |
| Ages 60-63 catch-up | $11,250 | $11,750 |
| 15-year catch-up (lifetime $15,000) | $3,000 | $3,000 |
| Annual additions | $72,000 | $75,000 |
| Roth catch-up wage threshold | $150,000 | $155,000 |
| IRA limit (catch-up) | $7,500 ($1,100) | $7,500 ($1,100) |
Figures come from IRS Notice 2025-67 (2026) and Notice 2026-66 (2027).
State-by-State Nuances for Tax-Sheltered Annuities
The table shows each state's tax year 2026 rules. Most states start from federal income, so 403(b) deferrals escape state tax too. Pennsylvania and New Jersey tax them up front. States change these rules often, so check your state revenue department.
| State | Treatment of 403(b) withdrawals, tax year 2026 |
|---|---|
| Alabama | Taxable, but filers 65 and older exclude the first $6,000 of plan distributions. |
| Alaska | No state income tax. |
| Arizona | Fully taxable. The $2,500 exclusion covers government pensions only. |
| Arkansas | Each taxpayer excludes up to $6,000 of retirement plan income. |
| California | Fully taxable as ordinary income. |
| Colorado | Excludes up to $20,000 at ages 55 to 64 and $24,000 at 65 and older. |
| Connecticut | Pension and annuity income is exempt below $75,000 of income (single) or $100,000 (joint), then phases out. |
| Delaware | Excludes up to $12,500 at age 60 and older, and $2,000 below 60. |
| District of Columbia | Fully taxable as ordinary income. |
| Florida | No state income tax. |
| Georgia | Excludes up to $35,000 at ages 62 to 64 and $65,000 at 65 and older. |
| Hawaii | Employer-funded amounts are exempt. Withdrawals traced to your own deferrals are taxable. |
| Idaho | Fully taxable as ordinary income. |
| Illinois | Exempt. Illinois does not tax qualified retirement plan distributions. |
| Indiana | Fully taxable at the flat state rate. |
| Iowa | Exempt once you are 55 or older. |
| Kansas | Fully taxable as ordinary income. |
| Kentucky | Excludes up to $31,110 per person. The rest is taxed at a flat 3.5%. |
| Louisiana | Filers 65 and older exclude up to $12,324 per person. |
| Maine | Offers a pension deduction, reduced by Social Security received. Maine Revenue Services publishes the amount. |
| Maryland | Pension exclusion at 65 and older covers employer plans, not IRAs. The Comptroller sets the amount yearly. |
| Massachusetts | Fully taxable. Only government pensions are exempt. |
| Michigan | The retirement subtraction is fully phased in. Use the Michigan Treasury maximum for your filing status. |
| Minnesota | Fully taxable as ordinary income. |
| Mississippi | Exempt, unless the withdrawal is an early distribution. |
| Missouri | Lower-income filers may deduct up to $6,000 per person. |
| Montana | Taxable. Filers 65 and older get a $5,500 senior subtraction. |
| Nebraska | Fully taxable as ordinary income. |
| Nevada | No state income tax. |
| New Hampshire | No tax. The interest and dividends tax was repealed starting with tax year 2025. |
| New Jersey | Deferrals are taxed up front, so only earnings are taxed later. Income-limited exclusion at 62 and older. |
| New Mexico | Taxable. Low-income filers 65 and older may exempt up to $8,000. |
| New York | Excludes up to $20,000 per person at 59½ and older. |
| North Carolina | Fully taxable at a flat 3.99%. |
| North Dakota | Fully taxable as ordinary income. |
| Ohio | Taxable at a flat 2.75%. A retirement income credit of up to $200 may apply. |
| Oklahoma | Excludes up to $10,000 per person. |
| Oregon | Fully taxable as ordinary income. |
| Pennsylvania | Deferrals are taxed up front. Withdrawals are exempt after 59½ and retirement. |
| Rhode Island | Excludes up to $50,000 per person at full retirement age, under an income limit. IRAs do not qualify. |
| South Carolina | Deduct up to $3,000 under 65 and $10,000 at 65 and older. |
| South Dakota | No state income tax. |
| Tennessee | No state income tax. |
| Texas | No state income tax. |
| Utah | Taxable at the flat state rate. An income-tested retirement credit may apply. |
| Vermont | Fully taxable as ordinary income. |
| Virginia | Taxable. Filers 65 and older may deduct up to $12,000, subject to income limits. |
| Washington | No state income tax on wages or retirement income. |
| West Virginia | Taxable. Filers 65 and older may deduct up to $8,000. |
| Wisconsin | Filers 67 and older exclude up to $24,000 per person of retirement income. |
| Wyoming | No state income tax. |
Pros & Cons of Tax-Sheltered Annuities (403(b) Plans)
Weigh these strengths and costs before you enroll.
| Pros of 403(b) Plans | Cons of 403(b) Plans |
|---|---|
| Tax-deferred growth: nothing is taxed until you withdraw. | Early withdrawal costs: income tax plus an additional tax before 59½, with exceptions. |
| Lower taxes now: pre-tax deferrals cut this year's taxable income. | Taxed later: pre-tax withdrawals are ordinary income. |
| Roth option: tax-free qualified withdrawals, and employer contributions can be Roth if the plan allows. | RMDs: pre-tax money must come out from 73, or 75 if born 1960 or later. Roth accounts are exempt. |
| High limits: far above an IRA, with extra catch-ups for older and long-serving workers. | Narrow menu: only annuity contracts and mutual funds. No individual stocks. |
| Employer match and Saver's Match: some employers match, and eligible lower-income savers get the federal match starting with 2027 contributions. | No collective trusts: the securities-law change to allow them has passed only the House and is not law. |
| Creditor protection: plan money is generally shielded from creditors. | Fees: some annuity contracts carry high fees and surrender charges. |
For most eligible workers, the tax breaks outweigh the limits. Check fees before you pick a vendor.
Mistakes to Avoid with 403(b) Tax-Sheltered Annuities
The headline mistake is treating 403(b) money as non-qualified. People who inherit or cash out an annuity often assume only the growth is taxed. In a pre-tax 403(b), every dollar is taxable.
- Using non-qualified annuity rules. Pre-tax 403(b) money has no basis, RMDs apply, and it can roll only to an eligible plan or IRA. Only Roth or after-tax amounts differ.
- Misreading the withdrawal rules. While employed and under 59½, you generally need a hardship or a loan. Cashing out early can mean income tax plus the additional tax covered above.
- Ignoring RMDs. For 2027, the missed-RMD excise tax is 25% of the shortfall, and less if you fix it within the correction window. Set a reminder for your start year.
- Skipping catch-ups. Use the age-50, ages 60-63 and 15-year catch-ups covered above if you can afford them.
- Forgetting the 2027 Roth rule for high earners. Above the wage threshold explained earlier, catch-ups must be Roth, so plan for no upfront deduction on them.
- Deferring too much across two employers. Each plan tracks only its own deferrals. Take the excess plus earnings out by April 15 of the following year.
- Taking a check instead of a direct rollover. A check triggers 20% withholding in 2027. Ask what code will appear in Box 7 of your Form 1099-R.
- Overlooking fees. Annuity contracts can carry surrender charges and high annual costs. Compare vendors before you sign.
- Cashing out a lump sum. One large withdrawal can push you into a higher bracket. Spreading withdrawals over several years often costs less.
When a 403(b) plan makes an error such as an excess deferral, the employer can usually fix it through the IRS's Employee Plans Compliance Resolution System without the plan losing its tax-favored status.
Real-Life Scenarios: 403(b) Plans in Action
Five 2027 cases show how the rules work for real savers.
| Scenario (tax year 2027) | Outcome |
|---|---|
| Alice, 55, a teacher with 20 years of service, wants to max out. | She can defer $25,500 + $3,000 (15-year catch-up, applied first) + $8,500 (age 50) = up to $37,000. |
| Alice earned above the Roth catch-up wage threshold in 2026. | Her age-based catch-up must go in as Roth. At ages 60 to 63, that catch-up would be $11,750 instead. |
| Brian works at a hospital with a 403(b) and moonlights at a firm with a 401(k). | He shares one $25,500 deferral limit across both plans. Each employer tracks only its own plan, so he must add them up. |
| Carla, 40, needs cash for medical bills while still employed. | A hardship withdrawal is taxable and faces the additional tax unless an exception applies, such as unreimbursed medical costs above 7.5% of adjusted gross income. |
| Carla looks at her other options. | She may take a $1,000 emergency personal expense distribution, or borrow up to 50% of her vested balance, capped at $50,000, repaid within 5 years. |
| David retires at 60 with pre-tax and Roth 403(b) money. | Born about 1967, his RMDs start at 75. His Roth 403(b) money has no lifetime RMDs. |
| David moves his balance to an IRA. | A direct rollover avoids the mandatory 20% withholding. Roth 403(b) money goes to a Roth IRA. |
| Emily changes jobs mid-year and defers too much across two 403(b) plans. | She must tell one plan and take out the excess plus earnings by April 15, 2028. |
| Emily misses the deadline. | The excess is taxed twice: once in 2027, and again when it is finally withdrawn. |
Comparing Tax-Sheltered Annuities to Other Retirement Plans
Here is how a 403(b) differs from the plans you may also hold.
403(b) vs. 401(k): Cousins in Different Sectors
The two plans work almost the same way. The main difference is who can offer them. You can also read whether 401(k) money is qualified under the same tests.
- Employers: 401(k)s serve for-profit companies. 403(b)s serve public schools, nonprofits and churches.
- Limits: identical for both plans, including the same catch-ups and the same annual additions cap.
- Investments: a 401(k) can hold almost anything. A 403(b) is limited to annuity contracts and mutual-fund custodial accounts.
- Collective investment trusts: 401(k)s can use them. For 403(b)s, the needed securities-law change has passed the House but is not law.
- Testing: 401(k) deferrals face yearly nondiscrimination tests. 403(b) deferrals follow the universal availability rule instead.
- Auto-enrollment: plans of either type set up after December 29, 2022 must auto-enroll employees. Governmental and church plans are exempt.
- Rule of 55: it is a separation-from-service exception, not an in-service withdrawal, and it applies to both plans.
- 15-year catch-up: only the 403(b) has it.
403(b) vs. 457(b): Two Plans Public Employees Might Have
Some public employers offer both. The IRS calls a governmental 457(b) a nonqualified, eligible deferred compensation plan, yet it is taxed much like a 403(b).
The limits are separate. For 2027 you can defer the full limit in the 403(b) and the same amount again in the governmental 457(b), plus age-based catch-ups in each.
- Early withdrawals: a 457(b) has no early-withdrawal additional tax. After you leave the job, you can take money out at any age and owe only income tax.
- Special catch-up: in the three years before normal retirement age, a 457(b) may allow up to twice the annual limit, or $51,000 for 2027.
- No stacking: you cannot use the special catch-up and the age-50 catch-up in the same year. You get the larger one.
- Service catch-up: the 15-year catch-up exists only in the 403(b).
One trap catches early retirees. Money rolled from a 457(b) into a 403(b) or an IRA becomes subject to the early-withdrawal tax. Leave it in the 457(b) if you may need it before 59½.
403(b) vs. Traditional and Roth IRAs
An IRA is yours alone, with no employer involved. You can fund both in the same year.
- Contribution limits: the 2027 IRA limit is $7,500, unchanged from 2026, plus a $1,100 catch-up at 50 or older. The 403(b) deferral limit is far higher.
- Deduction limits: if a workplace plan covers you, the 2027 traditional IRA deduction phases out from $83,000 to $93,000 single and $133,000 to $153,000 joint.
- Roth IRA income limits: 2027 eligibility phases out from $158,000 to $173,000 single and $250,000 to $260,000 joint. A Roth 403(b) has no income limit.
- Early access: an IRA has no rule of 55. Money taken before 59½ owes the additional tax unless another exception applies.
- RMDs: Roth IRAs and Roth 403(b)s both skip lifetime RMDs.
- Investments: an IRA can hold almost any fund or stock.
In bankruptcy, contributory IRAs are protected up to $1,711,975 under the April 1, 2025 adjustment to 11 U.S.C. section 522(n), which runs through March 31, 2028. Amounts rolled over from a 403(b) do not count toward that cap.
Tax-Sheltered Annuity (Qualified) vs. Non-Qualified Annuity
Insurers and advisers call 403(b) money qualified money. An annuity you buy yourself with after-tax dollars is non-qualified.
The mistake is applying non-qualified rules to a 403(b) annuity. Those rules tax only the earnings, use an exclusion ratio on annuity payments and require no RMDs.
A qualified 403(b) annuity works differently. Contributions went in pre-tax, so the whole withdrawal is taxable. RMDs apply, and yearly contributions are capped.
A non-qualified annuity is taxed on its earnings only, because you already paid tax on the premiums. There is no IRS contribution limit.
When you withdraw, only the earnings are taxable. Taken before 59½, those earnings also owe a penalty at the same rate under section 72(q).
Neither type gets a step-up in basis at death. Heirs owe income tax on the untaxed amounts.
The two cannot be mixed. A non-qualified annuity cannot be rolled into a 403(b). A 403(b) annuity can move to another 403(b) contract or roll to an IRA.
Example: The Same $100,000 Annuity, Qualified vs. Non-Qualified
In 2027, two retirees each cash out a $100,000 annuity. Each paid in $60,000.
The first is a 403(b) annuity funded with pre-tax pay. All $100,000 is ordinary income for 2027, and RMDs apply.
The second is a personal annuity bought with after-tax money. Only the $40,000 of 2027 earnings is taxable, and there are no RMDs. Here is what portion is taxable in more detail.
Now the mistake. The 403(b) retiree reports only $40,000 for 2027. That underreports income by $60,000 and invites an IRS notice.
403(b) vs. Defined Benefit Pensions
Many teachers and public workers have both. A pension is usually a section 401(a) plan, or a governmental plan, and defined benefit plans follow their own rules.
- Who funds it: the employer mostly funds a pension. You mostly fund a 403(b).
- Who bears the risk: a pension promises a set monthly benefit. A 403(b) pays whatever the account has grown to.
- Portability: a 403(b) rolls to an IRA or a new plan. A pension usually stays put.
- Payout: a pension pays for life. A 403(b) lasts only as long as the balance does.
The two work best together. The pension covers the basics, and the 403(b) adds savings you control.
403(b) Terms That Decide How Your Money Is Taxed
- Qualified plan: in the narrow sense, a section 401(a) plan. In the broad sense, a qualified retirement plan, which includes 403(b)s.
- Qualified vs. non-qualified money: qualified money sits in a tax-favored plan or IRA. Non-qualified money was already taxed before it was invested.
- Elective deferral: the pay you choose to send to the plan, up to the yearly limit.
- Age-based catch-up: an extra deferral allowed at 50 or older, with a larger amount at ages 60 to 63.
- 15-year service catch-up: an extra yearly deferral for long-term employees, with a lifetime cap. It is not indexed.
- Annual additions limit: the cap on your deferrals plus employer contributions, $75,000 for 2027.
- Roth 403(b): after-tax contributions with tax-free qualified withdrawals and no lifetime RMDs.
- RMD: the yearly minimum withdrawal from pre-tax money, starting at 73, or 75 if born in 1960 or later.
- Excess deferral: an amount over the limit. It must come out by April 15 of the next year.
- Hardship distribution: a withdrawal for an urgent need. You may self-certify the need if the plan allows.
- Direct rollover: a transfer straight to another plan or IRA, with no tax withheld.
- Universal availability: if one employee can defer, nearly all must be allowed to.
What to Do Next
- Check Box 12 of your Form W-2 for code E, which shows your 403(b) deferrals.
- Set your 2027 deferral election, using the limits table above.
- Ask your plan whether it offers Roth contributions and the 15-year catch-up.
- If your 2026 wages topped the Roth catch-up threshold, plan for Roth catch-ups.
- Ask for a direct rollover, not a check, when you leave the job.
FAQs about Tax-Sheltered Annuities (403(b) Plans)
Are 403(b) tax-sheltered annuities considered qualified retirement plans?
Yes, for tax purposes. The IRS counts them as qualified retirement plans. Technically, they fall under section 403(b), not section 401(a).
Can a for-profit company offer a 403(b) plan to employees?
No. Only public schools, 501(c)(3) nonprofits and churches can sponsor a 403(b). Ministers can take part too. For-profit companies use a 401(k) instead.
Do I pay taxes on 403(b) withdrawals?
Yes, on traditional money. It is ordinary income federally and often for your state. Qualified Roth withdrawals are tax-free. Before 59½, an additional tax may also apply unless an exception fits.
Can I contribute to a 401(k) and a 403(b) in the same year?
Yes, but both share one deferral limit, the same cap shown in the limits table, plus catch-ups. A governmental 457(b) has its own limit.
Can I roll over my 403(b) account into an IRA or new employer’s plan?
Yes. After you leave the job, you can roll it to a traditional IRA or a new employer's plan that accepts rollovers. Roth 403(b) money rolls to a Roth IRA.
Is a 403(b) the same as a pension plan?
No. A 403(b) is an account you fund, and its value depends on contributions and returns. A pension promises a set benefit.
Can I get the Saver's Match on my 403(b) contributions?
Yes, starting with 2027 contributions, if your income is within the 2027 limits. The 2027 match is 50% of up to $2,000. Claim it on Form 8880-A.
Do my 2027 403(b) catch-up contributions have to be Roth?
Only if your 2026 FICA wages from that employer topped the threshold in the limits table. Without a Roth option, you cannot make catch-ups.
Is 403(b) annuity money 'qualified' or 'non-qualified' money?
Qualified. Pre-tax money is fully taxable when withdrawn, and RMDs apply. A non-qualified annuity is bought personally with after-tax dollars, outside any plan.
Do Roth 403(b) accounts have required minimum distributions?
No, not during the owner's lifetime. You no longer need to roll to a Roth IRA to avoid them. Beneficiaries still follow the inherited-account rules.