Difference Between 403b and 457b: A Comprehensive Guide

So, you're trying to decide between a 403b and a 457b plan for your retirement savings. Let's break it down.

The main difference between a 403b and a 457b plan is who's eligible to participate. A 403b plan is available to certain types of employees, including those working for non-profit organizations, hospitals, and government agencies.

Most employers offer 403b plans, but 457b plans are typically offered by government agencies and tax-exempt organizations.

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A 457 plan is a type of retirement account designed for certain government and tax-exempt employees. It's similar to a 403(b) plan in that it allows employees to contribute pre-tax dollars, reducing their taxable income.

In fact, a 457 plan works very similarly to a 403(b) plan, with employees contributing and employers potentially contributing on their behalf.

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A 457 plan is a type of employer-sponsored retirement account available to some state and local government workers, as well as certain nonprofit employees.

There are two different kinds of 457 plans: the 457(b) and the 457(f). The 457(b) plan is the more common of the two, and can be offered to civil servants, nonprofit employees, and other state and local government workers.

457(b) plans allow employees to make contributions to the plan, and these investments are allowed to grow tax-deferred. This means you won't have to pay taxes on the money until you withdraw it in retirement.

The contribution limit for 457 plans is $22,500 in 2023, including both employee and any employer contributions. This limit will increase to $23,000 in 2024.

Here are the key differences between 457 and 403(b) plans at a glance:

Catch-up contributions are available for those aged 50 and over, with a limit of $7,500 in 2023 and 2024. Some 457 plans may also allow special catch-up contributions, which can be double the annual limit or contribute funds that were eligible but not contributed in previous years.

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A 457 plan is specifically designed for government public service employees, including police officers and firefighters. These plans are a great option for those who might not have access to a 401(k) plan.

You need to be an employee of a government entity, such as a state or local government, to be eligible for a 457 plan. This includes employees of government agencies, municipalities, and public institutions.

The 457b plan has some attractive features that set it apart from other types of employer-sponsored retirement accounts. One of the main benefits is high contribution limits, with a maximum of $22,500 in 2023 and $23,000 in 2024 for 457(b) plans.

Special catch-up contributions may be available for those 50 and over, allowing an additional $7,500 in contributions each year. Some plans also offer special catch-up contributions in the last three years before retirement age, with a limit of up to double the annual limit.

Withdrawals from 457b plans are more flexible than those from other retirement accounts, allowing government employees to withdraw funds without penalty once they leave their job. However, these accounts are still subject to required minimum distributions (RMDs) starting at age 72 or 73.

Here are some key details about 457b plan withdrawals:

You can easily roll over your 457b plan into other types of retirement accounts, such as an IRA or 401(k), if you leave your job.

One of the biggest advantages of a 457 plan is the high contribution limits. You can contribute up to $22,500 in 2023, with a maximum of $23,000 allowed in 2024 for a 457(b) plan.

These plans are especially attractive to well-paid executives who can take advantage of the high contribution limits. However, there is a catch - we'll get to that in a minute.

Some 457(b) plans allow for special catch-up contributions, which can be a game-changer for those who start investing later in life. For those aged 50 and over, you can add an extra $7,500 in 2023 and 2024 on top of the base contribution limit.

If your plan allows it, you can also make special catch-up contributions in the last three years before you reach retirement age. These contributions can be up to double the annual limit, so for 2023, that's $45,000 and $46,000 in 2024.

Withdrawals from a 457 plan are more flexible than other types of retirement accounts. Once you leave your job, you can withdraw funds without paying the 10% early withdrawal fee, even if you're under 59½.

However, you will still be subject to required minimum distributions, or RMDs, once you reach age 72 or 73, depending on your birthday.

You can easily roll over your 457 plan into other types of retirement accounts, such as an IRA, 403(b), or 401(k). This can help you keep all your retirement funds in one or two accounts and avoid missing RMDs once you reach retirement age.

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A 457 plan has some drawbacks to consider. Only available through an employer, you need to be employed by a public sector organization to have access to one. This isn't an account you can just opt into on your own.

Unlike IRAs, a 457 plan is unlikely to come with an employer match. In the private sector, many employers offer to match employee retirement contributions, but this is rare in the public sector. This means you won't have the opportunity to double your retirement savings with a match.

Your investment options may be limited with a 457 plan. You'll likely only be able to choose from mutual funds and annuities, which leaves out other investment options like ETFs and individual stocks and bonds.

If you have a 457(f) plan, you risk forfeiting your contributions if you leave your job before you're vested. This means you'll lose the money you contributed entirely, which can be a significant setback.

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The 403(b) plan is a type of retirement account designed for public school and non-profit employees, allowing employees to contribute and employers to contribute on their behalf.

A 457 plan is a valuable tax-advantaged retirement savings vehicle for government and non-profit workers, offering special bonus features and flexibility.

The 403(b) and 457(b) plans are supplemental retirement plans that allow you to save up to the IRS limits for additional savings.

Contributions to a 457 plan are limited, and it's seldom subject to employer matching, but you can contribute to a 457 plan while also contributing to another type of retirement account, like a 401(k) or IRA.

The balance you'll have at retirement is determined by your contributions, plus accumulated earnings on those amounts.

The 403(b) and 457(b) plans generally work the same, with the major difference being in how the plans consider and penalize withdrawals.

You may be eligible to contribute to both a 403(b) and a 457(b) if you're an employee of a state or local governmental agency, or a 501(c) organization.

The 457(b) plan is often referred to as a deferred compensation plan.

Contributions to a 457(b) plan are subject to certain limits.

You can contribute up to $23,500 to a 457(b) plan for the year 2025, which is a $500 increase from 2024.