403(b) vs. 457

Attribute	403(b)	457
Tax-Advantaged	Yes	Yes
Eligibility	Available to employees of certain tax-exempt organizations, public schools, and ministers	Available to state and local government employees, as well as some non-governmental employees
Contribution Limits	Up to $19,500 in 2021, with catch-up contributions for those aged 50 or older	Up to $19,500 in 2021, with catch-up contributions for those aged 50 or older
Employer Contributions	May offer matching or non-elective contributions	May offer matching or non-elective contributions
Withdrawal Penalties	10% penalty for withdrawals before age 59 ½, with exceptions	10% penalty for withdrawals before age 59 ½, with exceptions
Investment Options	Typically offers a range of investment options, including mutual funds and annuities	Typically offers a range of investment options, including mutual funds and annuities
Portability	May be portable to another eligible employer's plan or an IRA	May be portable to another eligible employer's plan or an IRA
Plan Type	Generally offered by educational institutions, hospitals, and non-profit organizations	Generally offered by state and local governments

Introduction

When it comes to planning for retirement, it is essential to understand the various retirement plans available to individuals. Two popular options for employees of certain tax-exempt organizations and government entities are the 403(b) and 457 retirement plans. While both plans offer tax advantages and help individuals save for retirement, they have some key differences that individuals should consider when making their investment decisions.

Eligibility and Contribution Limits

One of the primary differences between the 403(b) and 457 plans lies in their eligibility requirements and contribution limits. The 403(b) plan is typically available to employees of public schools, colleges, universities, and certain non-profit organizations. On the other hand, the 457 plan is designed for employees of state and local governments, as well as some non-governmental tax-exempt organizations.

Regarding contribution limits, both plans allow individuals to contribute a certain percentage of their salary towards their retirement savings. As of 2021, the maximum contribution limit for a 403(b) plan is $19,500, with an additional catch-up contribution of $6,500 for individuals aged 50 and older. In contrast, the 457 plan has a separate contribution limit, which is also $19,500 for 2021, but it allows individuals within three years of their plan's normal retirement age to contribute up to double the annual limit, known as the "double-up" provision.

Overall, while both plans have similar contribution limits, the 457 plan offers an additional advantage for individuals nearing retirement age, allowing them to potentially contribute more towards their retirement savings.

Withdrawal Rules and Penalties

Another crucial aspect to consider when comparing the 403(b) and 457 plans is their withdrawal rules and penalties. The 403(b) plan follows the traditional retirement account rules, where withdrawals before the age of 59 ½ are generally subject to a 10% early withdrawal penalty, in addition to income taxes. However, there are exceptions to this penalty, such as financial hardship or disability.

On the other hand, the 457 plan has more flexibility when it comes to withdrawals. Individuals who separate from service can withdraw funds from their 457 plan without incurring the 10% early withdrawal penalty, regardless of their age. However, income taxes will still apply to the withdrawn amount. This feature can be particularly advantageous for individuals who plan to retire early or have other financial needs before reaching the traditional retirement age.

It is important to note that while the 457 plan offers more flexibility in terms of early withdrawals, it does not provide the same exceptions for financial hardship or disability as the 403(b) plan. Therefore, individuals should carefully consider their financial situation and long-term goals before making any early withdrawal decisions.

Investment Options

When it comes to investment options, both the 403(b) and 457 plans offer a range of choices to suit different investment preferences. The specific investment options available may vary depending on the employer or plan provider. However, in general, both plans offer a variety of mutual funds, annuities, and other investment vehicles.

One key difference between the two plans lies in the ability to take loans from the account. The 403(b) plan allows participants to take loans from their account balance, subject to certain limitations and repayment terms. These loans can be useful in times of financial need, but it is important to consider the potential impact on long-term retirement savings.

On the other hand, the 457 plan does not typically allow for loans. Instead, it may offer a different type of withdrawal option known as "unforeseeable emergency withdrawals." These withdrawals are only permitted in cases of severe financial hardship and are subject to strict criteria and documentation requirements.

Ultimately, individuals should carefully review the investment options and loan provisions of each plan to determine which aligns better with their investment preferences and potential future financial needs.

Tax Considerations

Both the 403(b) and 457 plans offer tax advantages that can help individuals maximize their retirement savings. Contributions to both plans are made on a pre-tax basis, meaning they are deducted from the individual's taxable income for the year. This reduces the individual's current tax liability and allows their retirement savings to grow tax-deferred until withdrawal.

However, there is a difference in how the plans are taxed upon withdrawal. Withdrawals from a 403(b) plan are generally subject to ordinary income tax rates. On the other hand, withdrawals from a 457 plan are also subject to ordinary income tax rates, but they may be eligible for a special tax treatment known as the "substantially equal periodic payments" exception. This exception allows individuals who separate from service to receive withdrawals in substantially equal installments over their life expectancy, potentially reducing the tax burden.

It is important to consult with a tax professional or financial advisor to fully understand the tax implications of each plan and how they align with an individual's overall tax strategy and retirement goals.

Portability and Rollover Options

Portability and rollover options are important considerations for individuals who may change jobs or retire and want to transfer their retirement savings to another account. Both the 403(b) and 457 plans offer portability and rollover options, but there are some differences to be aware of.

The 403(b) plan allows individuals to roll over their account balance into another eligible retirement plan, such as an Individual Retirement Account (IRA) or another employer-sponsored retirement plan, if they change jobs or retire. This rollover option provides individuals with the flexibility to consolidate their retirement savings and potentially access a wider range of investment options.

Similarly, the 457 plan also allows for rollovers into other eligible retirement plans. However, it has an additional advantage in terms of portability. Individuals who change jobs or retire can roll over their 457 plan balance into another employer's 457 plan, as long as the new employer's plan accepts rollovers. This feature can be particularly beneficial for individuals who move between jobs within the same sector or industry.

Overall, both plans offer portability and rollover options, but the 457 plan provides an additional advantage in terms of potential rollovers between employers' plans within the same category.

Conclusion

Choosing between a 403(b) and 457 retirement plan requires careful consideration of an individual's specific circumstances, goals, and preferences. While both plans offer tax advantages and help individuals save for retirement, they have distinct differences in terms of eligibility, contribution limits, withdrawal rules, investment options, tax considerations, and portability.

Individuals should thoroughly evaluate these attributes and consult with a financial advisor or retirement planning professional to determine which plan aligns best with their long-term financial goals. By making an informed decision, individuals can maximize their retirement savings and ensure a more secure financial future.