Retirement saving plans can sometimes seem like a complicated jumble of letters and numbers. And if you work in the public sector, you may have even more options to consider, including the 457 plan and the 403(b) plan. While both can help secure your financial future in retirement, they do have some important differences. So, if you’re faced with the choice between a 457 plan and a 403(b), or if you’re just doing your research, here’s what you need to know.
The 457 Plan
A 457 plan is an employer-sponsored retirement account that’s available to certain government workers and nonprofit employees. There are actually two types of 457 plans: the 457(b) and the 457(f).
The 457(b) plan is the more common option and is offered to civil servants, nonprofit employees, and other government workers. On the other hand, the 457(f) plan is rarer and typically only available to high-level executives at select nonprofit organizations.
Like other retirement plans, employees make contributions to the 457 plan, and these investments grow tax-deferred. But 457 plans also have some unique features that set them apart.
Pros of 457 Plans
Let’s take a closer look at the advantages of 457 plans:
- High contribution limits: 457 plans offer high annual contribution limits. In 2023, the maximum contribution for a 457(b) plan is $22,500 ($23,000 for 2024). 457(f) plans have no annual contribution limit, allowing participants to contribute as much as they’d like.
- Special catch-up contributions: If you start saving later in your career, catch-up contributions can make a big difference. Most 457(b) plans allow participants aged 50 and over to make catch-up contributions of $7,500 in both 2023 and 2024. Some plans even allow additional catch-up contributions in the last three years before retirement, potentially doubling the annual limit.
- Flexible withdrawals: Unlike other retirement accounts, 457(b) account holders can withdraw funds without penalty once they no longer work for the sponsoring employer, even before reaching the no-withdrawal-penalty age of 59½. However, these accounts are still subject to required minimum distributions (RMDs) starting at age 72 or 73.
- Easy rollover: If you leave your job, you can roll over your 457 plan into other retirement accounts like an IRA, 403(b), or 401(k).
Cons of 457 Plans
Here are some limitations to consider:
- Employer sponsorship required: Unlike an IRA, you can’t open a 457 plan on your own. You must be employed by a public sector organization to have access to a 457 plan.
- Unlikely employer match: While private sector employers often provide a match for employee retirement contributions, it’s rare to find an employer match with a 457 plan in the public sector.
- Limited investment options: 457 plans, like 403(b) plans, generally limit investment choices to mutual funds and annuities. If you prefer a wider range of investment options, you can consider a self-directed investment account through a brokerage.
- Risk of forfeiture with 457(f) plans: Contributions to 457(f) plans are subject to “substantial risk of forfeiture.” If you leave or lose your job before you’re vested, you may lose the contributed money entirely.
The 403(b) Plan
The 403(b) plan, also known as a tax-sheltered annuity or TSA plan, is designed for public school employees and certain nonprofit workers, such as those in churches or charities. Both employees and employers can contribute to the 403(b) plan, which operates similarly to a 401(k) but for the public sector.
Pros of 403(b) Plans
Consider the advantages of 403(b) plans:
- Even higher contribution limits: While the annual contribution limit for 403(b) plans is the same as for 457(b) plans ($22,500 for 2023 and $23,000 for 2024), the overall limit can be much higher. With employer contributions, the limit can reach up to $66,000 ($69,000 in 2024).
- Special catch-up contributions: Participants aged 50 and over can make catch-up contributions of $7,500 for both 2023 and 2024. If you’ve been with the same organization for 15 years or longer, your contribution limit may permanently increase by $3,000 or more under certain circumstances.
- Easy rollover: Like the 457 plan, a 403(b) plan can be rolled over into other retirement accounts.
Cons of 403(b) Plans
Consider these limitations when considering a 403(b) plan:
- Limited investment options: Similar to 457 plans, 403(b) plans generally offer limited investment choices, typically limited to annuities and mutual funds.
- Early withdrawal penalties: With a few exceptions, early withdrawals from a 403(b) plan before the age of 59½ will incur a 10% penalty. Loans from a 403(b) may be possible but could impact potential investment growth.
- Employer sponsorship required: You can only access a 403(b) plan through certain employers, usually public schools, churches, or nonprofits.
457 Plans vs. 403(b) Plans: Key Differences
To make things easier, let’s summarize the key differences between 457 plans and 403(b) plans:
| 457 Plan | 403(b) Plan | |
|---|---|---|
| Who’s eligible? | State and local government workers and certain nonprofit employees | Public school workers and certain nonprofit employees, including some clergy and charity workers |
| Contribution limit 2023 | $22,500 (including both employee and employer contributions) | $22,500 for employee contributions; up to $66,000 including employer contributions |
| Contribution limit 2024 | $23,000 (including both employee and employer contributions) | $23,000 for employee contributions; up to $69,000 including employer contributions |
| Catch-up contributions | For those aged 50 and over ($7,500 for 2023 and 2024); potential special catch-up contributions in the last three years before retirement | For those aged 50 and over ($7,500 for 2023 and 2024); potential increased contribution limit for employees of 15+ years |
| Withdrawal penalties | No early withdrawal penalties after severance from employment | Early withdrawal penalties before age 59½, with exceptions for death, disability, and severance |
| Investment options | Limited to mutual funds and annuities | Limited to mutual funds and annuities |
| Required Minimum Distributions (RMDs) | Yes, starting at age 72 or 73, depending on your birthday | Yes, starting at age 72 or 73, depending on your birthday |
When is a 457 Plan the Right Choice?
If you’re a government or nonprofit worker with access to a 457 plan, it can be a valuable retirement savings vehicle. 457 plans offer tax advantages, higher contribution limits, and flexible withdrawal options. However, they don’t always have the highest contribution limits and employer matching is uncommon. Keep in mind that you can contribute to a 457 plan while also contributing to other retirement accounts like a 401(k) or IRA, as long as you follow the rules.
When is a 403(b) Plan the Right Choice?
If you work at a public school, church, or nonprofit organization, a 403(b) plan can be a smart way to save for retirement. With potential employer matches and higher contribution limits, 403(b) plans offer additional benefits. However, be aware that investment options may be more limited compared to other retirement accounts. By combining different types of investment vehicles, you can create a well-rounded retirement strategy.
Can You Have Both a 403(b) and a 457(b)?
Technically, it’s possible to have access to both a 403(b) and a 457(b) plan simultaneously. However, most employers offer only one type of account. If you do have access to both, you can contribute to each but ensure you understand the contribution limits and rules to avoid penalties.
TIME Stamp: 457 and 403(b) Plans Offer Solid Retirement Savings Options
Both 457 plans and 403(b) plans provide valuable options for saving for retirement in the public sector. The higher contribution limits, catch-up contributions, and flexibility of these plans can make a significant difference in your financial future. Keep in mind that these plans are only available through employer sponsorship, so not everyone can open one. Fortunately, alternatives like IRAs are available for those without employer-sponsored retirement accounts. Your retirement options are like an alphabet soup, and having multiple choices can be a good thing!