403(b) vs. 457(b): What Are They And What Is The Difference?

It’s never too early to start saving for retirement. Whether you’ve just started working for a company or have been employed for a while, you should become informed on your retirement savings options as early in your career as possible. One of the ways that most Americans plan for retirement is through employer-sponsored and tax-deferred retirement savings plans. Employers offer these contribution plans which allow you to defer a percentage of your salary toward retirement. Two popular options are 403(b) and 457(b) retirement plans.

What is a 403(b) Plan?

A 403(b) plan is available only to public school employees, certain ministers, and employees of tax-exempt organizations, like hospitals and charities. It's not available to employees of privately owned companies or government employees. The former would use a 401(k) while the latter would have a 457(b) plan, discussed below.

You may contribute up to $22,500 to a 403(b) in 2023. Adults 50 and older may make an extra $7,500 in 2023. What makes the 403(b) unique is that it allows for additional contributions of up to $3,000 per year for employees who have been with the employer for at least 15 years. There's a $15,000 lifetime maximum on these catch-up contributions.

For a long time, you could invest only in annuities through a 403(b), but you can now invest in mutual funds as well. However, some plans may offer only annuities, which can make the plans more expensive than a 401(k) or 457(b) plan, with which you have a broader array of investment options.

Some 403(b) plans match employee contributions, but as with 457(b)s, this is rare. When 403(b)s do allow matching, vesting periods are often short or immediate. This enables you to keep your employer-matched funds as soon as you earn them, even if you leave the company.

What is a 457(b) Plan?

The 457(b) plan is offered by state and local government agencies as well as certain nonprofits. Contributions are deducted from your paycheck and grow tax-free while they’re held in the account. As with 403(b)s, you may be able to contribute to a traditional or Roth 457(b) account.

Employers have the option to contribute to their employees’ 457(b) accounts, but most choose not to. With a 457(b), you’ll probably be entirely responsible for saving for retirement on your own.

If you have a 457(b) plan, you can contribute up to $22,500 for 2023. You can also contribute an additional $7,500 in 2023 in "catch-up" contributions if you’re 50 or older. Beginning after Dec. 31, 2024, with the passage of the SECURE Act 2.0, the catch-up limits for 457 plan participants increase for those aged 60 to 63 to the greater of $10,000 or 150% of the “standard” catch-up amount for that year.

You may be able to contribute as much as twice the limit if you're within three years of normal retirement age. This amount is $45,000 for 2023, up from $41,000 in 2022. However, your maximum contribution when you are within three years of normal retirement age is the lesser of twice the contribution limit or the annual limit plus the unused annual limit from prior years.

Contributions into your 403(b) or 457(b)

You must consult with your employer to make contributions to your 403(b) plan. Because this plan allows you to invest pre-tax money from your wages, it’s important that you tell your employer the amount you want deferred and deposited into your 403(b) account. This process is sometimes called an elective deferral. Through an elective deferral you are designating a percentage of your paycheck into your 403(b) account. This automatically decreases your take-home pay, but it lowers your taxable income and, most importantly, it boosts your future retirement fund.

Some employers will also contribute to their employees’ 403(b) accounts.  Many employees will make contributions based on what you contribute to your own plan, called a matching contribution. However, employers may also contribute without asking for anything in return. With the 457(b) plan employees can similarly deduct pre-tax money from their wages as contribution toward their plan.

Differences between the 403(b) Plan and the 457(b) Plan

The 457(b) and 403(b) offer identical tax advantages for your retirement savings. Here are the key differences:

  • Employer Contributions. Employers may contribute to their employees’ 403(b) and 457(b) accounts. That said, employer contributions are much less common than with 401(k) accounts. The 403(b) has a much higher limit than the 457(b), which lacks a separate contribution limit for employers. 457(b)s only allow $22,500 in contributions from any source in 2023, whereas 403(b)s allows total contributions of $66,000, including $22,500 from an employee.
  • Catch-up Contributions. Both plans allow special catch-up contributions. You may be able to contribute up to an additional $15,000 over five years to a 403(b) if you’ve worked for the same employer for at least 15 years. Meanwhile, you may be able to effectively double your annual contribution limits for 457(b)s during the three years leading up to federal retirement age, assuming you previously didn’t max out your 457(b) contributions.
  • Investment Options. Both plans generally offer more limited investment options than 401(k)s. Typically, you can only invest in annuities and mutual funds. You’ll probably be able to construct a basic three-fund portfolio—but if you find your plan’s investment options lacking, fees too high, or would prefer your retirement funds not be subject to losses in the "market", rolling your retirement funds into an Fixed Indexed Annuity may be the option you're looking for to grow and protect your retirement money.

Can you have both a 403(b) and a 457(b)?

Often your company will dictate whether you have a 403(b) or a 457(b) plan. If you work for the government, you'll likely get a 457(b) plan, and if you work for a public school or a church, you will probably have a 403(b). The only people who may have to make a choice between the two are some nonprofit employees.

Receiving your retirement funds from your 403(b) Plan or 457(b) Plan

403(b) plan distribution rules resemble those of 401(k) plans and are reported each year on Form 1099-R, which is mailed to plan participants:

  • You can start taking distributions at age 59½, whether or not you’re still working at that organization.
  • Distributions taken before age 59½ are subject to a 10% early-withdrawal penalty unless a special exception applies. However, under the CARES Act, those over age 55 who have lost their job could also take out money without penalty.
  • All normal distributions are taxed as ordinary income.
  • Roth distributions are tax-free. However, employees must either contribute to the plan or have a Roth IRA open for at least five years before being able to take tax-free distributions.
  • Required minimum distributions (RMDs) must begin at age 73 in 2023 with the passage of the SECURE Act of 2022. Failure to take a required minimum distribution will result in a 25% excise tax on the amount that should have been withdrawn.
  • Loan provisions may also be available at the employer's discretion. The loan rules are also mostly the same as those for 401(k) plans. Participants cannot access more than the lesser of $50,000 or half of the plan balance. Any outstanding loan balance not repaid within five years is treated as a taxable or premature distribution.
  • Beginning in 2024, participants will be able to access up to $1,000 annually from retirement savings for emergency personal or family expenses without paying the 10% early withdrawal penalties.
  • The 457(b) plan rules state that you don’t have to pay a 10% tax penalty if you resign or retire before age 59.5 and need to withdraw money from your account.  

Which is right for you?

It really is dependent on your personal set of circumstances, future goals, and risk tolerance. Both accounts can be financial vehicles to save for retirement, but you may prefer one over the other based on your situation. For example, if you've been with your company at least 15 years, a 403(b) will offer you the chance to make extra contributions you may not get with your 457(b). But if you're close to the normal retirement age for your 457(b), it might enable you to contribute more than a 403(b).

Ultimately, the most important thing is saving regularly, whichever type of account you have. You could have the best retirement account there is, but it won't matter if you're not actively using it. If you have any questions about how your 403(b) or 457(b) plan works, ask your employer for more information so you can make smart decisions about how to best save for your retirement.

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