A 403(b) is a retirement savings plan offered by certain public schools and nonprofit organizations to their employees. It’s similar to a 401(k), but there are some important differences. For example, 403(b)s have stricter rules about when and how you can withdraw your money.

If you’re thinking about saving for retirement, a 403(b) may be a good option. But it’s important to understand how these plans work before you decide if one is right for you. Here’s what you need to know about 403(b)s.

Contributing to a 403(b)

You can contribute to a 403(b) with after-tax or pretax dollars. If you contribute with after-tax dollars, you’ll pay taxes on the money when you withdraw it in retirement. If you contribute with pretax dollars, you’ll pay taxes on the money when you withdraw it in retirement.

There are two types of 403(b)s: traditional and Roth. With a traditional 403(b), you contribute with pretax dollars and your withdrawals are taxed as ordinary income. With a Roth 403(b), you contribute with after-tax dollars and your withdrawals are tax-free.

Some employers also offer a “designated Roth account” as part of their 403(b) plan. This is basically a Roth 401(k). You make after-tax contributions to the account and all earnings and withdrawals are tax-free.

Investing in a 403(b)

The money in your 403(b) account is invested in annuities or mutual funds. Annuities are insurance contracts that can provide a stream of income in retirement. Mutual funds are investments that are made up of stocks, bonds, and other securities.

Most 403(b) plans offer a limited selection of investment options. This can make it difficult to build a diversified portfolio. But some employers offer a “self-directed” 403(b) plan that gives you more control over your investment choices.

Withdrawing from a 403(b)

You can start withdrawing money from your 403(b) at age 59 1/2. If you withdraw money before then, you’ll usually have to pay a 10% early withdrawal penalty.

There are some exceptions to the early withdrawal penalty. For example, you may be able to avoid the penalty if you’re using the money to pay for certain medical expenses or if you’re withdrawing a small amount each year through a “substantially equal periodic payment” plan.

You’re required to start taking withdrawals from your 403(b) at age 70 1/2. The amount of your withdrawal is based on your life expectancy and the balance in your account.

The rules for Roth 403(b)s are different. With a Roth 403(b), you can withdraw your contributions anytime without paying taxes or penalties. And you’re not required to take withdrawals at any age.

Taxes on 403(b) Withdrawals

If you withdraw money from a traditional 403(b) before retirement, you’ll pay taxes on the withdrawal plus a 10% early withdrawal penalty if you’re under age 59 1/2. If you withdraw money from a traditional 403(b) after retirement, you’ll pay taxes on the withdrawal but not the early withdrawal penalty.

With a Roth 403(b), you can withdraw your contributions anytime without paying taxes or penalties. And if you wait until after retirement, you can withdraw your earnings tax-free as well.