When thinking about saving strategies planning for retirement, you have a lot of options to choose from. Although
So, how do you choose? Although they have many similarities, 403(b) vs. 457(b) retirement savings plans carry distinct differences.
Both are
What is a 403(b)?
What is a 457(b)?
Key differences between 403(b) & 457(b) plans
While these employer-sponsored retirement plans have several similarities, they are decidedly different. Here are the key details to understand for each.
Contributions
You can contribute up to $22,500 through payroll deductions as well as an additional $7,500 in
- Employer contributions into a 403(b) plan do not count toward the $22,500 salary deferral limit. Instead, salary deferrals and employer matching contributions combined cannot exceed the annual additions limit of $66,000.
- Matching contributions to a 457(b) plan are rare. However, they do count toward the $22,500 contribution limit.
Catch-up rules
In addition to the standard $7,500 catch-up 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 hadn't fully funded their salary deferral contributions in prior years.
Early withdrawal penalties
Withdrawals from employer-sponsored plans and IRAs taken before you reach 59½ are generally subject to an early withdrawal penalty equal to 10% of the amount withdrawn. 403(b) and 457(b) plans may provide an exception to this rule: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.
Can you contribute to both a 403(b) & 457(b)?
The employer decides which plans are available to which groups of employees. So, you may be able to contribute to both plans. If both are available to you, you can contribute the maximum amount allowed under both plans. Unlike contributions to other employer plans like 403(b), 401(k) 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.
Which is better, a 403(b) or 457(b)?
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.
The differences are summarized below in this 403(b) vs. 457(b) comparison chart:
| 457(b) | 403(b) | | |
Key points | Common with state and local governments; may allow tax-deferred or Roth contributions. | Offered by educational institutions, hospitals, and churches; may allow tax-deferred or Roth contributions. | | |
Contributions & limits | Annual limit of $22,500. Employer matching contributions are rare. | Annual limit of $22,500. Employers often provide matching contributions. | | |
Employer matching contributions | Count toward $22,500 limit | Do not count toward $22,500 limit | | |
Catch-up contributions | $7,500 if age 50 or over; Annual limit doubled in each of 3 years prior to retirement. | $7,500 if age 50 or over; Additional $3,000 per year if with an employer for at least 15 years. Capped to $15,000 lifetime total. | | |
Early withdrawal penalties | No penalty regardless of age if you've separated from your employer. | 10% if under 59½. Possible exception if 55+ and separated from employer. |
Work with an expert
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