Understanding 457(b) vs. 403(b) Retirement Plans

January 4, 2024 Beginner
Learn about the differences between 457(b) and 403(b) and how you might be eligible for this retirement account if you work for public service or the government.

One of the best things you can do for your future self is to start saving for retirement as early as possible. Many employers offer tax-advantaged retirement plans, including public service and government organizations. These plans encourage workers to save and help them take advantage of potential compounding returns over time. They also allow workers to take advantage of their employer deducting contributions directly from their paycheck BEFORE taxes are paid. This allows them to "pay themselves first", plus eases the burden of sending in contributions on their own.

If you work in public service, you might be offered a 457(b) or a 403(b). Here's what you need to know about 457(b) versus 403(b) retirement plans.

What is a 457(b) plan?

A 457(b) is generally offered to government public service employees.

"You need to be an employee of a government entity, like a state or local government," said Christine Russell, senior manager, retirement and annuities at Schwab. "That might also include police officers or firefighters employed by a government."

Many of these plans let you make contributions before taxes, allowing your money to grow tax-deferred. Later, when you withdraw from the plan, you pay taxes on the amount of the withdrawal at your marginal tax rate. Getting a tax break now can sometimes be an advantage, especially if you end up in a lower tax bracket during retirement. Later, you might owe less in taxes on the amount you withdraw, depending on your situation and how the tax regulations shape up in the future. Many municipal workers don't have access to the typical 401(k) plan, so they should seriously consider opting into the 457(b) plan, which allows similar retirement saving benefits.

One of the interesting benefits of a 457(b) retirement plan is that you don't end up with an early withdrawal penalty if you leave your job and need to take distributions. This is different from many other tax-deferred retirement plans like 401(k) plans, which tack on a 10% penalty if you withdraw money early, except in certain circumstances.

What is a 403(b) plan?

The 403(b) plan is usually offered to nonprofit workers in nongovernment jobs, according to Russell. For example, teachers at public or private schools, workers with 501(c)(3) charities, employees for some hospitals, and ministers with some religious organizations can contribute to these plans.

Unlike the 457(b), the 403(b) plan is subject to a 10% early withdrawal penalty if you take distributions before you reach age 59 1/2. But like the 457(b)—and 401(k) plans—contributions to a 403(b) plan are typically made with pretax dollars.

Additionally, a 403(b) may allow you to take money out of the plan as a "loan," and if you pay it back timely, you'll have no taxes or penalty on the amount of the loan.

457(b) vs. 403(b): Contributions limits for 2023 and 2024

Both of these plans have the same basic contribution limits. In 2023, the contribution limit is $22,500 and for 2024, the contribution limit is $23,000Both plans allow for a catch-up contribution of up to $7,500 per year (for 2023 and 2024) for those who are age 50 and older.

Note that 457(b) and 403(b) plans both have special provisions for making additional contributions on top of the basic contributions.

  • 457(b): Make an additional contribution—up to a grand total of $45,000 for 2023 or up to $46,000 in 2024—if you're within three years of your normal retirement age.
  • 403(b): Contribute an extra $3,000 per year if you have a tenure of 15 years and have contributed an average of $5,000 or less per year during that time.

These contribution rules can be attractive to those who work in nonprofit and government organizations. Check with your employer to see if your contributions can be taken directly from your paycheck and put into an investment account.

It's also worth checking to see if your employer offers matching contributions. If so, a percentage of your contributions can be matched by the employer and added to your retirement account. This "free money" can potentially help you take advantage of tax-efficient compounding returns. Some plans also make additional employer contributions, further expanding your potential retirement savings. Check with your human resources department to make sure you understand all the benefits you are entitled to once you participate in a plan. 

457(b) vs. 403(b) plans: Bottom line

It's important to understand that you're only eligible for these plans if you have a specific type of employer that offers them. You won't get to choose between them, and there aren't "solo" versions of these plans like you might see with a 401(k).

Both plans can be rolled into individual retirement accounts (IRAs) if you leave your employer and want to preserve your tax deferred status.

If your employer doesn't offer a tax-advantaged retirement plan, you might consider opening an IRA to make your own contributions. However, it's important to note that your annual contributions to an IRA are much lower, limited to $6,500 for 2023 and $7,000 for 2024 ($7,500 in 2023 and $8000 in 2024, if older than 50). It's better than not contributing anything, though. Those who have income on the side or run a business might be able to open a SEP or SIMPLE IRA, both of which have higher contribution limits for business owners. "Plus, business owners contributing to SEP, SIMPLE IRA, or Solo 401(k) plans can get a tax deduction for these contributions, thus not only increasing retirement savings, but reducing their tax burden as well," Russell added.

In the end, it's important to consider your choices and talk to your employer about retirement benefits. Find out whether there's a 457(b) or 403(b) plan available to you and, if there is, consider making plans to contribute regularly.

Schwab does not provide tax advice. We suggest you consult with a tax professional with regards to your personal circumstances.

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