403(b)s vs 457(b)s: Comparing benefits and differences

Saving for retirement is one of the smartest financial moves you can make, and understanding your employer's plan options is key to getting started. If you're deciding between a 403(b) vs. a 457(b), it’s important to know the unique perks each one offers. Your employer may offer you the choice of both, but understanding the differences between them can help you choose the best fit for your goals. Let's break down what you need to know to make an informed decision.

A 403(b) is an employer-sponsored retirement savings plan for public sector employees. Your employer may offer a 403(b) if you're employed full-time by a educational institution, hospital, church or other 503(c)(3) organization. With a traditional 403(b), you contribute pre-tax dollars directly from your paycheck. Your investments grow tax-deferred until you begin withdrawing funds in retirement, at which point you’ll pay taxes on the withdrawals.

Your employer may offer a Roth 403(b), which operates similarly to a traditional 403(b) but with a key difference: you contribute after-tax dollars. This means you pay taxes on the contributions now, but your withdrawals in retirement are tax-free, provided you meet certain conditions.¹ This can be a great choice if you expect to be in a higher tax bracket in retirement.

Learn more about how tax brackets work

A 457(b) plan is a retirement savings option offered by state and local governments, public schools and some non-profit organizations. Contributions to traditional 457(b) plans are made with pre-tax dollars, and the earnings grows tax-deferred, meaning you won’t owe taxes until you withdraw the funds—typically in retirement. This can help lower your taxable income during your working years.

Some employers may offer a Roth 457(b) that provides a back-loaded tax benefit. Similar to a Roth 403(b), they are funded with dollars that have already been taxed so when it comes time to withdraw funds, you don't have to pay taxes on the contributions. Additionally, earnings may be withdrawn tax-free if certain criteria are met.¹

While these employer-sponsored retirement plans have several similarities, they are decidedly different. Here are the key details to understand for each.

In 2025, you can contribute up to $23,500 through payroll deductions as well as an additional $7,500 in catch-up contributions if you are 50 or over. This is true of both plans—the distinction lies in how your employer's matching contributions (if any) affect this limit:

• Employer contributions into a 403(b) plan do not count toward the $23,500 employee contribution limit. Employer matching contributions, paired with employee contributions, can be made up to an annual combined limit of $70,000 ($77,500 if you are 50 or older).
• Matching contributions to a 457(b) plan are rare. However, they do count toward the $23,500 contribution limit.

In addition to the standard $7,500 catch-up contribution for people 50 or over, each plan has a unique catch-up feature as well:

• 457(b) plans allow you to double your maximum contribution in the three years preceding retirement. However, there are two main points to keep in mind regarding this rule:
  
  • You cannot make a double contribution in the same year as the $7,500 catch-up.
  • Double contributions are limited to any previously unmet maximum contribution limit. If you've contributed the maximum amount each year you've had the plan, then you can't exceed a single limit.
• 403(b) plan participants who have been with their employer for at least 15 years may contribute an additional $3,000 per year up to a lifetime limit of $15,000 if they haven't fully funded their contribution limits in prior years.

Withdrawals from employer-sponsored retirement plans taken before you reach age 59½ are generally subject to an early withdrawal penalty equal to 10% of the amount withdrawn. 403(b) and 457(b) plans may provide an exception to this rule:

• You may be able to take penalty-free withdrawals from your 403(b) if you separated from your employer in the year you turn 55 or older.
• If you no longer work for the employer sponsoring your 457(b) plan, you can take penalty-free withdrawals regardless of your age.

Withdrawals from traditional 403(b)s and 457(b)s made after age 59½ will be taxed at your ordinary income rate.

In Roth versions of 403(b)s and 457(b)s, qualified withdrawals are completely tax-free in retirement. To make a qualified withdrawal, you'll need to have had the account for at least five years and be at least 59½. However, if you withdraw earnings from your Roth 403(b) without meeting the requirements of a qualified withdrawal, then income taxes and a 10% penalty may apply.

A unique advantage of Roth accounts is that earnings grow and can be withdrawn tax-free, which makes them a tax-efficient way to reduce your tax liability in retirement.¹

Required minimum distributions (RMDs), the minimum amount of money you must withdraw from a tax-deferred retirement plan after you reach a certain age, will be required for traditional versions of 403(b)s and 457(b)s. At that point, your RMDs will be taxed at your ordinary income rate.

Roth 403(b)s and Roth 457(b)s are not subject to RMDs. That means that you can leave the money in those accounts as long as you'd like so it can continue to experience tax-deferred growth.

The differences are summarized below in this 403(b) vs. 457(b) comparison chart:

The employer decides which plans are available to which groups of employees. So, you may be able to contribute up to the maximum amount to both plans if they are available to you. Unlike contributions to other employer plans like 403(b)s, 401(k)s and SIMPLE IRAs—which you must combine to determine if you've met the maximum salary deferral limit—contributions to 457(b) plans are separate.

Neither plan is universally better than the other for all retirement savers. If you have to choose between them, consider their unique features and differences to choose the one that will best fit your needs. For example, if you plan to retire early, then a 457(b) may be the better option due to the opportunity for penalty-free withdrawals.

Additionally, when choosing between a traditional or Roth version of the plan offered to you, take the following considerations into account:

• If you think you're currently at peak earnings potential and expect to be in a lower tax bracket in retirement, a traditional version may be appropriate since you'll be paying those taxes in retirement.
• If you think your peak earnings point is farther off and you expect to be in a higher tax bracket in retirement, then a Roth version may be more beneficial since you'll be paying those taxes in a lower tax bracket now.

When you're saving for retirement, a financial advisor can help you spot opportunities and make tax-efficient choices. Reach out to a financial advisor for personalized insights and trusted guidance.