Retirement saving basics: 457 plan vs. 403(b)

Sep 20, 2024 9:44 AM

Retirement saving basics: 457 plan vs. 403(b)1

　　The well-known 401(k) plan has become the default savings vehicle for many for-profit companies nationwide. But if you work for a state or local government or a nonprofit organization, chances are you’ll see a different alphanumeric soup to describe your retirement savings plan: 403(b) or 457.

　　Like 401(k)s, 403(b) and 457 plans are defined contribution plans that allow you to set aside pretax dollars for use in retirement. The plans differ from defined benefit plans, which are still integral to many retirement packages offered to teachers as well as state and local government employees.

　　Both 457 and 403(b) plans are increasingly common choices for government and nonprofit workers. Your options depend on where you work and the type of work you do.

　　Retirement plans for government and nonprofit employeesThe 403(b) plan is generally offered to employees at private nonprofits, religious ministers, and other church employees. Some public school employees might also have access to a 403(b).

　　A 457(b) plan is a tax-advantaged retirement savings plan available to local government workers and some employees of nonprofit organizations, such as firefighters, law enforcement officers, municipal employees, and other civil servants.

　　457(b)—Typically offered to state and local government employees.457(f)—A supplemental plan that is offered to highly compensated executives and some managers at nonprofit organizations. It’s often used as a recruiting tool.Discussions about 457 plan benefits generally refer to 457(b)s, which operate similarly to 401(k)s and 403(b)s. Rules for 457(f)s differ, but most workers aren’t likely to encounter a 457(f) plan in their benefits packages.

　　Contribution limits for 457(b) plans and 403(b)sIn many ways, both 457(b) and 403(b) plans operate similarly to 401(k) plans, with similar contribution and catch-up limits.

　　In 2024, the contribution limit is $23,000, with a catch-up contribution of $7,500 for workers 50 and older. The 403(b) has an additional mechanism for extra contributions. Those who have worked for their employer for at least 15 years can add $3,000 a year to the account, up to a lifetime limit of $15,000.With a 457(b) you might be eligible to contribute up to twice the usual limit if you’re within three years of the normal retirement age, allowing you to stash away up to $46,000 in 2024. Normal retirement age is defined by the Internal Revenue Service (IRS) as either age 65 or “the age that the participant has a right to retire and receive full benefits under the [plan].”Starting in 2025, the SECURE Act 2.0 allows 457(b) and 403(b) plan participants ages 60 to 63 to contribute an additional amount—up to $10,000 or 150% of the catch-up contribution, whichever is greater.457(b) vs. 403(b): Main differencesSome key differences exist between 457 plans and 403(b)s. Understanding them can help you to make better decisions about your benefits.

　　For example, a 403(b) usually has more hardship and loan choices than a 457(b). Additionally, if your employer offers a 403(b) plan, it may include a Roth option that allows you to contribute after-tax dollars to avoid paying taxes at withdrawal time, typically during retirement. The 457(b) also offers a Roth option, but only through government-sponsored plans.

　　A 403(b) has the same withdrawal requirements as a 401(k), meaning distribution taken before age 59½ may result in a penalty. You can take a loan from your 403(b) if allowed, but you must repay it. Your 403(b) funds are eligible for rollovers to an individual retirement account (IRA) or another qualified plan.

　　Pros and cons of 457 and 403(b) plans

Pros of a 457 plan	Cons of a 457 plan
Double contributions within three years of the normal retirement age.	Matching contributions from employers count toward your annual limit.
Immediate access to your savings should you resign, retire, or otherwise no longer work for the employer offering the 457 plan.	Participants in 457(f) plans must work for at least two years to receive benefits.
Rollovers into other accounts, such as IRAs and 401(k)s, may be permitted.	Hardship distribution requirements are more restrictive than 401(k)s.

Pros of a 403(b) plan	Cons of a 403(b) plan
Opportunities for additional contributions, including catch-up contributions.	Investment choices can be limited, including mutual funds inside an annuity contract.
Hardship distributions and 403(b) loans are allowed, including access to the emergency $1,000 withdrawal instituted for the 401(k).	You must wait until age 59½ to take penalty-free withdrawals unless you meet certain conditions.
Rollovers into other accounts, such as IRAs and 401(k)s, are allowed.	Some additional contributions require at least 15 years of service.

Is a 457 plan better than a 403(b)?For many employees, a 457(b) and a 403(b) have similar advantages, especially when considered as the public and nonprofit sector alternative to the private sector 401(k). The contribution limits and rules are similar. Because these are employer-sponsored plans, you might not get to choose which one is available to you.

　　If your employer offers both, your decision might depend on how much you want to be able to contribute in later years. If you can contribute more, especially if you’re approaching the normal retirement age, a 457(b) may make more sense. For those who plan to retire earlier and have worked a long time at a nonprofit, a 403(b) can provide a way to make some extra contributions just before retirement. A 403(b) can also help with tax diversity if your employer offers a Roth option.

　　Carefully consider your goals and the investments available with each plan before deciding.

　　The bottom lineThe 457 and 403(b) are employer-sponsored retirement plans that provide nonprofit or public sector workers a way to save for retirement that’s similar to 401(k) plans. Depending on your employer’s benefits package, you may be able to participate in both plans, allowing you to save more than you could through a single plan.

　　Like 401(k)s, 457 and 403(b)s plans are defined contribution plans that take deductions from your regular paycheck and deposit them into an account that typically offers a range of investment options. Employers sometimes match your contributions, but up to only a certain amount.

　　If your employer doesn’t sponsor a retirement savings plan, consider opening an IRA, which allows you to make tax-advantaged contributions to an investment account to help provide a more secure financial future for you and your family.

　　ReferencesIRC 457(b) Deferred Compensation Plans | irs.govIRC 403(b) Tax-Sheltered Annuity Plans | irs.gov

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