403b vs. 457b: The Differences And How To Spend Efficiently

Shawn Plummer

CEO, The Annuity Expert

What Are They?

403(b) Plan: A retirement savings plan offered to employees of public schools, certain non-profits, and some religious organizations. Contributions are made with pre-tax dollars, lowering your taxable income, and investments grow tax-deferred until withdrawal.

457 Plan: A deferred compensation plan available to state and local public employees, as well as employees of some non-profit organizations. Like the 403(b), contributions are pre-tax and reduce your taxable income, with tax-deferred growth until withdrawal.

403B Vs. 457(B)

457 Plan Pros

  • You can pay an extra $7,500 annually if you’re at least 50 years old.
  • Unlike other retirement plans, your 457(b) benefits become available to you without penalties when you no longer work for the employer, even if you are younger than 59½ years old.
  • When you leave your job, you can roll over your account into an IRA, 401k, or IRA annuity. This option is only for the 457(b) plan, not the 457(f) plan.

457 Plan Cons

  • Employer contributions count as part of your annual maximum contribution.
  • Limited governments provide matching programs within the 457(b) plan. Employees have the responsibility to save enough to meet their own needs.

The 457(f) requires that employees work for two years before being eligible for this plan. If the executive leaves the company before their time ends, they forfeit any rights to the 457(f) plan.

403(B) Pros

  1. Tax-Deferred Growth: Contributions to a 403(b) plan are made with pre-tax dollars, which can lower your taxable income. The investments grow tax-deferred until you withdraw them in retirement.
  2. Employer Match: Some employers offer a matching contribution to your 403(b) plan, which can significantly enhance your retirement savings.
  3. Higher Contribution Limits: The contribution limits for 403(b) plans are generally higher than those for individual retirement accounts (IRAs), allowing you to save more each year.
  4. Loan Options: Many 403(b) plans allow you to take loans against your account balance, providing financial flexibility in emergencies.
  5. Catch-Up Contributions: Employees aged 50 and older can make additional catch-up contributions, further increasing their retirement savings.

403(B) Cons

  1. Limited Investment Choices: 403(b) plans often have fewer investment options compared to other retirement accounts, such as IRAs or 401(k)s, potentially limiting your ability to diversify.
  2. Early Withdrawal Penalties: Withdrawing funds before age 59½ typically incurs a 10% penalty and taxes on the distribution, reducing the amount you receive.
  3. Required Minimum Distributions (RMDs): Starting at age 72, you must take minimum distributions from your 403(b) plan, which could increase your taxable income in retirement.
  4. Administrative Fees: Some 403(b) plans have high administrative fees and expenses, which can eat into your investment returns over time.
  5. Limited Pre-Retirement Access: Access to funds before retirement is restricted, with few exceptions, which could be a disadvantage if you need liquidity.

Key Differences

Feature403(b) Plan457 Plan
Contribution LimitsSame for both: $23,000 in 2024Same for both: $23,000 in 2024
Catch-Up ContributionsAvailable for those 50+ and for certain long-term employeesAvailable for those 50+, plus a special catch-up if closer to retirement without maxing out previous contributions
Withdrawal Rules10% penalty if withdrawn before age 59½ (with some exceptions)No early withdrawal penalty, but taxes are due
Employer MatchCommon, but not guaranteedLess common than 403(b)
Investment OptionsCan be limited based on the employer’s offeringsOften similar limitations as 403(b) plans

Which Is Better For You?

  • Age at Retirement: If you plan to retire or change careers before age 59½, a 457 plan may offer more flexible withdrawal options without penalties.
  • Employer Match: If your employer offers a match, a 403(b) could provide immediate returns on your contributions.
  • Investment Choices: Both plans may have limited options, but it’s worth comparing the specifics of what’s available through your employer.
  • Catch-Up Contributions: If you’re nearing retirement and haven’t maximized contributions, the 457 plan’s special catch-up provision might allow you to save more.
403B Vs. 457B

Conclusion

Both 403(b) and 457 plans offer valuable opportunities to save for retirement with pre-tax contributions. The choice between them often depends on your specific employment situation, retirement goals, and the unique features of each plan. Understanding their differences enables you to make an informed decision about which plan aligns best with your financial objectives.

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Frequently Asked Questions

Can I have both a 403b and a 457b?

Yes, you can have a 403(b) and a 457(b) if you are eligible for both plans. Typically, these are offered by nonprofit employers and governmental entities. Having both allows you to contribute the maximum allowable limit to each plan, potentially doubling your tax-advantaged savings.

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Shawn Plummer

CEO, The Annuity Expert

Shawn Plummer is a licensed financial professional, insurance agent, and annuity broker with over 14 years of first-hand experience with annuities and insurance. Since beginning his journey in 2009, he has been pivotal in selling and educating about annuities and insurance products. Still, he has also played an instrumental role in training financial advisors for a prestigious Fortune Global 500 insurance company, Allianz. His insights and expertise have made him a sought-after voice in the industry, leading to features in renowned publications such as Time Magazine, Bloomberg, Entrepreneur, Yahoo! Finance, MSN, SmartAsset, The Simple Dollar, U.S. News and World Report, Women’s Health Magazine, and many more. Shawn’s driving ambition? To simplify retirement planning, he ensures his clients understand their choices and secure the best insurance coverage at unbeatable rates.

The Annuity Expert is an independent online insurance agency servicing consumers across the United States. The goal is to help you take the guesswork out of retirement planning and find the best insurance coverage at the cheapest rates

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