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403b vs 457b Plan. Which One Should You Choose?

403b vs 457b
Published on
June 28, 2024

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403b vs 457b plan – what’s the difference and which one is better? Well, if you want to build your ideal post-retirement life, you must have your finances sorted. And for that, you need to have a well-rounded retirement plan. Moreover, employees working in government as well as non-profit organizations are now offered several employer-sponsored, tax-advantaged retirement plans, such as 403b and 457b, etc. Furthermore, these plans provide employees with the retirement funds they need to secure financial stability after they have stopped working. Want to know more about these retirement plans? Here is your guide on everything you should know about 457b vs 403b.

Key Takeaways!

  • Public sector companies and non-profit organizations provide their employees with tax-advantaged plans including 403(b) and 457(b). 
  • Both plans have a $23,000 limit for 2024, with $7,500 catch-up; 457b allows up to $46,000 near retirement.
  • 403b requires 59½ for penalty-free withdrawals, with 10% early penalty; 457b has no penalty for job leavers.
  • 403b offers tax benefits and catch-up contributions but has early withdrawal penalties; 457b has tax benefits and flexibility.

403b Plan vs 457b Plan. Your Comprehensive Guide

As aforementioned, 403b and 457b are the two retirement plans offered to government and non-profit employees. Both of these plans are quite beneficial in helping employees gather adequate funds for a financially peaceful retirement life. Moreover, you should know that both of these retirement plans are highly efficient but both of these differ from each other in certain ways. Having a know-how about the eligibility, aspects, benefits and more of these plans will give you a clear idea of what to expect and how to plan ahead. Therefore, we are here to help you! Here is a comprehensive guide – comparison – of 403b vs 457b retirement plans. Let’s get started!

What is a 403b Plan?

Before discussing 403b vs 457b, you should about both plans in detail. Let’s begin with the 403(b) plan. It is a tax-advantaged retirement plan offered by non-profit employers. When you sign up for this plan, a specific amount deducts from your paycheck. Furthermore, you get to save and grow these funds without worrying about taxes. Yes, that’s right! This plan is tax-deferred or tax-free.

“403(b) is a tax-benefited retirement plan that allows its participants to save for retirement through payroll deductions while availing of certain tax benefits.” – Investopedia

Hence, this can be your way forward to ensure peace of mind regarding financial planning. Besides, you should know that public schools and non-profit organizations offer this plan to their employees. You may be wondering who is eligible for this retirement plan. Well, these plans are mostly used by educational institutions. However, any entity that complies with IRS Section 501(c)(3) can adopt it. Besides, the participants can be:

  • Employees of public schools, state colleges, and universities
  • Indian tribal government public school employees
  • Employees of tax-exempt organizations
  • Ministers and clergy members
  • Church employees

These may include teachers, professors, nurses, doctors, librarians, or anyone who works in these organizations. These are the employees who can benefit from this plan and save up a decent amount for a peaceful retirement.

Did You Know?There is a special 403(b)(9) plan devised specifically for the employees of churches, like clergy and ministers.

What are the Types of 403(b) Plan?

Before comparing 403b vs 457b, we are on our way to thoroughly talk about 403(b) plan. You should also know that this plan has two types. And both of these offer different benefits to their participants. Moreover, these types are: traditional 403(b) and Roth 403(b) plans. If you are interested in knowing more about these types (what they offer and how they differ from each other), here is a comprehensive comparison for you:

Types of 403(b) Plan

Traditional 403(b) Plan

Roth 403(b) Plan

This plan lets the employee have pretax money deducted from their paycheck. The deduction of taxes happens when the employee withdraws the money. The contributions of the Roth version involve the after-tax money for contributions. As a result, the withdrawals after retirement are tax-free.

Hence both plans have their own perks and downsides. Additionally, you should know that not all employees can access the Roth plan. Apart from this, the traditional version offers immediate tax benefits but there are no immediate benefits in the latter one. But really you should go with the version that makes your retirement planning more efficient and stress-free.

403(b) Plan – What are its Contribution Limits?

As you know by now, 403b plans allow its participants to save for retirement and grow their investments while enjoying several tax benefits. Moreover, this plan is regulated on the basis of certain contribution limits which became similar to that of 401k plans. 

According to the Internal Revenue Service, here are the 2024 contribution limits of the 403b plan:

  • For 2024, the annual contribution limit is $23000
  • Individuals over 50 can contribute around $7500 as a catch-up contribution
  • Employees with 15-year tenure can make an extra $3000 catch-up each year
  • The above 15-year rule has a lifetime limit of $15000 per employer

Important Note!

The catch-up contribution limit for employees will rise to $10,000 or you can say 150% of the standard catch-up contribution for the relevant year. These regulations will be effective after 31st December 2024.

However, there is another option that lets employers make matching contributions based on the limits of the Internal Revenue Service – which allows the overall employee-employer contributions of $69000. Moreover, according to the updated plans, the employee must be 591/2 years of age to withdraw these retirement funds. Or else they may have to pay the early withdrawal penalty.

403(b) Plan – What are the Distribution Criteria?

As mentioned before, 403b and 401k plans are quite similar in terms of certain regulations. This also includes the distribution rules. Moreover, the relevant authorities separately mail these rules and regulations to the participants every year:

  • You have to be at least 591/2 years old to withdraw money
  • Apart from special cases, early withdrawals are subject to a 10% penalty
  • The tax on other normal distributions is similar to the regular income
  • Those who have a Roth plan or Roth IRA can enjoy tax-free distributions
  • Those who turned 73 in 2023 can begin with Required Minimum Distributions (RMDs)
  • If you fail to take the required minimum distribution, you pay a 25% excise tax on that RMD amount
  • Effective 2024, the participants will be able to withdraw $1000 annually for emergency expenses.
  • Loan provision rules are also similar to 401k plans. Participants can only take up to the lesser of $50,000 or half of their plan’s total amount.

With a thorough know-how of these regulations, you are all set to make informed decisions regarding your retirement finances and investment planning. You can assess how to manage several expenses, savings, and emergencies during your retirement – easily so! While we are on our 403b vs 457b quest, you should know about the latter plan too. Let’s discuss what it holds for you.

Insider Info!According to the National Tax-Deferred Savings Association, a survey gathered data from 250 organizations and revealed that 80% of the employees contributed to 403(b) plans in 2022.

What is a 457b Plan?

Want to know who takes the score in 403b vs 457b? Well, for that you should first know what is 457(b) plan. Just like 403(b), this one is also a tax-advantaged plan. The participants of this plan get to take out some amount from their salaries without being taxed. Instead, they pay regular income taxes on your regular withdrawals. Besides, the employees – the participants – have the freedom to choose where to invest this amount. This mostly includes mutual funds and annuities.

“The employees can even contribute a 100% of their salaries to the 457(b) plan. However, it should not exceed the dollar limit set for the year.” – Internal Revenue Service

You should know that the 457(b) plan is one of the types of 457 plans. These plans are of two types and the other one is 457(f). 

Quick Question: What is the 457(f) Plan?

457(f) is one of the two types of 457 plans. Although both plans specifically benefit the government and non-profit employees, this one is for highly compensated executives. Furthermore, this plan is also called SERP (Supplemental Executive Retirement Plan). After all, it’s a supplement to 457(b). This plan allows the employer to make more contributions to the employer’s account than usual.

You may be wondering what makes you eligible for a 457(b) plan. Well, here is a list of participants who are eligible to sign up and avail of the benefits of this plan:

  • Civil servants
  • Police personnel
  • Employees of Government agencies
  • Employees of public service & non-profit organizations

This list also includes firefighters, paramedics, municipal employees as well as public school teachers. Additionally, keep in mind that this plan is not for top-level executives at these institutes. Instead, they are subjected to 457(f).

Important Note!

Similar to its contender, 457(b) also has two variants: traditional and Roth 457(b) plans. In case of the traditional plan, deduction happens on pre-tax income and vice versa.

457(b) Plan – What are its Contribution Limits?

For the next step in our quest of the 457b vs. 403b quest, we are discussing the contribution limits of 457b. Moreover, the IRS sets these limits and the participants have to abide by them. For the year 2024, these include:

  • The contribution limit for employees increased from $22500 to $23000 for 2024
  • You can also contribute all of your income if it's less than the set limit
  • The catch-up contributions for the tax year 2024 is $7500, increasing the max limit to $30500
  • Double-limit catch-up provisions allow participants within 3 years of retirement to contribute up to $46000

Did You Know? 457(b) features a double limit catch-up provision that allows the employees to contribute for the years for which they hadn’t but they were eligible to do so.

457(b) Plan – What are the Distribution Rules?

We have discussed the contribution limits of the 457b plan. But do you know what benefits it offers for during the withdrawal stages? Well, let’s find out together. The best thing that makes these plans more considerable as compared to 403b or 401k are as follows:

  • The withdrawal age for this plan is also 591/2
  • Individuals don’t have to pay an early withdrawal fine on leaving a job
  • Although there is no penalty, you still have to pay regular income tax in the above case

The no-early withdrawal penalty removes a lot of stress from informed decision-making. After all, it saves you from paying out a big chunk of fines. And you get to keep it for yourself. As a result, you get to grow and mature with the right amount of money you need to build your ideal lifestyle.

403b vs 457b. How are they Different from Each Other?

Now that we have thoroughly discussed each plan in detail, it's now time to come to the main topic for which we are here: which one is better 403b vs 457b? As you already know that both of these offer specific set of benefits. Both are tax-advantaged and both let you save up to build your ideal lifestyle. Moreover, both of these plans are for government and non-profit employees. So, what is it that makes 403b vs 457b different from each other? And which one is a better option? Well, for this, let’s discuss what benefits each of these offer:

What are the Perks of 403(b) Plan?

While we are on our 403b vs 457b quest, we should know what the benefits of each plan are. After all, the benefits are what we are here for. Moreover, the biggest benefit of this plan is that it sets you off for a stress-free retirement. Other than this, these plans offer several perks for contributions and distributions.

  • Tax Benefits

  • Number one is the fact that the returns in these 403b plans enjoy tax benefits. This allows to you’re your money and save up for the life ahead without many hurdles. Moreover, the tax conditions vary based on the version you choose: traditional or Roth.

  • Vesting Funds

  • Many plans allow funds to vest over a shorter period of time or sometimes immediate vesting. These plans are said to resemble the 401(k)s big time. However, this is where these two plans differ: 401k plans never allow immediate vesting of funds.

  • Catch-Up Contributions

  • Another advantage is the 15-year rule. It gives participants the chance to make $3000 annually or a $15000 of lifetime contributions. Because you are working for the same employer for 15 years, you are exempt from the condition of being 50 to take advantage of the catch-up provision.

What are the Disadvantages of 403(b) Plan?

403(b) surely comes with some prominent perks. But this plan has some disadvantages too. Let’s talk about them below:

  • Early Withdrawal Penalty

  • The main thing – and the most obvious one – that makes this plan a bit disadvantageous is the early withdrawal penalty factor. After all, when you give 10% of your return in fines, you are losing a significant amount of your savings.

  • Lesser Investment Choices

  • With this plan, you have a very narrow set of investment choices. This is also a disadvantage as you don’t have many choices to put your hard-earned income into. You can mostly invest in mutual funds and annuities only.

  • No creditor Protection

  • One of the major downsides of 403b plan is the lack of creditor protection. Unlike some tax-advantaged plans that provide protection, this plan doesn’t. In other words, these plans don’t provide any shield from creditors in the event of bankruptcy or lawsuits.

What are the Perks of the 457(b) Plan?

Now that we know what benefits 403(b) provides, we should also know what the other one has to offer. Offering a different set of perks, 457b also promises a stress-free retirement. The following are some of the reasons why you can go for this retirement plan:

  • Tax Benefits of Overall Income

  • The best thing about 457b is the tax benefit it offers. For this plan, you take out the contribution amount from your income before taxes. And the tax implies on the remaining amount after the contribution. This way you have to pay less taxes and you can maximize your tax savings. Another benefit is that you don’t have to pay taxes on the return amount until you withdraw it.

  • No Penalty on Early Withdrawal

  • Besides the tax perks, this plan also lets you skip the penalty on early withdrawal (as mentioned several times). This way, you won’t have to lose a big chunk of your return to penalties and fines. Sounds good, right? It's even better practically because it gives you room to save up for your post-retirement goals.

According to the regulations set by Internal Revenue Service, you can even skip the penalty on early withdrawals without switching jobs amid a list of unforeseen reasons.

What are the Disadvantages of 457(b)?

Every retirement plan comes with its own set of advantages. However, you should know that downsides always accompany perks. Here are a few disadvantages of 457(b):

  • Penalty on Roll-overs

  • Early withdrawals in the situation when the plan holder decides to switch and roll over to another plan will lead to a 10% penalty. While this plan offers a lot of penalty exemptions, this is a downside of it. Therefore, you have to carefully assess this factor before signing up for the 457b plan.

  • Employer Matching

  • In the case of 457b, employers can match their contributions to that of employees. However, this is not a common practice. Furthermore, if an employer decides to do so, they have to abide by the maximum limit set that the authorities have set.

A Comparison Chart of 403b vs 457b Plans

We have discussed all the pros and cons these plans come with. You can assess them and decide for yourself what’s better for you. Or else you can have a look at the comparison chart of 403b vs 457b below:

A Comprehensive Comparison of 403b and 457b Plans

403b Plan

457b Plan

Pros
  • Tax Benefits
  • Shorted Vesting Periods
  • Better Catch-up Contributions
  • Tax Benefits on Income
  • No Penalty
Cons
  • Early Withdrawal Penalty
  • No Credit Protection
  • Lesser Investment Options
  • Penalty on Roll-Overs
  • Rare Chances of Employer Matching

403b vs 457b – Which Plan is Better?

Now that you know about the benefits, downsides, elements, contributions, and distribution rules of both the plans, you can make the right choice for yourself. Thinking which one among 403b vs 457b is better? Well, this depends on your financial situation, future goals, and needs. Assess what you want and then make a choice. So, choose wisely; after all, your choice is going to impact your future – big time. If you think you need assistance making this decision, you can contact a professional retirement planning specialist. They how to navigate the retirement complexities and will offer well-rounded advice.

Quick Question: 403b vs 457b – Can You Contribute to Both?

Well, yes! You can contribute to both plans at once. But is this a good decision? Well, to assess whether this is a good idea or not, you should contact a professional consultant. He will assess your situation and provide you with the insights you need to choose what’s right for you. Moreover, if you sign up for both, you have to completely follow the IRS limits for both.

Ending Thoughts on 403b vs 457b!

If you have come here reading, you are completely aware of what both 403b and 457 plans have to offer. Moreover, these plans are no less than good news for government and non-profit employees. It’s like a reward for their years of grinding themselves in hard work. Besides, it’s their key to establishing the lifestyle you want to lead for yourself and your loved ones. But the most important factor here is to make the right decision. After all, your life depends on it.

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