Teacher & State Employee 403(b) & 457(b) Plans
What's The Difference Between 403(b) and 457(b) Plans?
Employees of nonprofit organizations and state and local governments benefit from tax-advantaged retirement savings in 403(b) and 457(b) plans. Some employees have access to both types of retirement plans. Our network of licensed agents and registered investment advisors at My State Pension will help you determine which plan options work best for your goals based on your budget and your retirement plans.
Understanding a 403(b) Plan
A 403(b) plan is a tax-advantaged retirement account in which your investments grow over time either tax-deferred or tax-free. You make a contribution to the account from your paycheck and if you contribute to a ROTH 403(b) where taxes are taken out before you contribute, your withdrawals in retirement are generally tax-free.
Similar to other employer-sponsored retirement plans like a 401(k), you may take penalty-free withdrawals when you turn 59½ years old except under certain circumstances.
403(b) Contribution Limits
As of 2021, the contribution limit for a 403(b) is the lesser of $19,500 or 100% of your compensation. There are a few instances in which you may be able to contribute more:
- If you are 50 or older, you can contribute an additional $6,500 each year.
- If you’ve been with your employer for 15 years or more, you can contribute an extra $3,000 per year up to $15,000 total for your lifetime.
Some employers contribute to 403(b) plans. In 2021, the maximum 403(b) total contributions between you and your employer must be $58,000 or your total compensation, whichever is less (the amount increases to $64,500 for those 50 and older).
Understanding a 457(b) Plan
457(b) plans are offered by state and local government agencies and some nonprofits. Like 403(b) plans, contributions are made directly from your paycheck and the money grows tax-free while in the account which can be set up as a ROTH or a traditional retirement plan.
Although employers have the option to contribute to this type of plan, most don’t. In general, employees are primarily responsible for funding 457(b) retirement accounts.
Compared to other tax-advantaged retirement plans, the withdrawal policy is very different. If you are still working for the plan’s sponsor, it is very difficult to make withdrawals from this account no matter how old you are. On the other hand, if you’ve left that job, you can access the funds without the 10% age penalty that other retirement funds have.
457(b) Contribution Limits
Similar to a 403(b) plan, you can contribute up to the lesser of $19,500 or 100% of your compensation in 2021. If you are 50 or older, you can contribute an additional $6,500 per year toward your retirement. 457(b) plans offer a special “catch-up” provision:
- For the three years leading up to the federal retirement age, you can contribute up to double the annual contribution limit for that year.
- Note: You cannot contribute both the additional $6,500 and the double catch-up limit amount. You are also limited to contributing no more than the difference between the maximum you could have contributed to the 457(b) the previous year and the amount you actually did.
Notable Differences Between a 403(b) and 457(b)
Although there are some similarities between 403(b) and 457(b) plans, especially the tax advantages of both accounts, there are some differences to be noted if you have the option to choose plans.
Employer Contributions
Employers may contribute to either plan but the 403(b) plan has a much higher employer limit. A 457(b) only allows $19,500 in contribution from any source, but a 403(b) allows total contributions of $58,000, including $19,500 from an employee.
Catch-Up Contributions
Although both plans allow for catch-up contributions, you must have worked for the same employer for at least 15 years in order to contribute up to an additional $15,000 over the course of 5 years with a 403(b) plan. With a 457(b), you could potentially double your contribution limits during your last three years of employment leading to federal retirement age if you have not yet maxed out your 457(b) contributions.
Withdrawals
With both plans, you can take penalty-free withdrawals once you turn 59½. However, with a 457(b) plan, you are eligible to take withdrawals penalty-free if you leave the sponsoring employer.
Understanding Your Investment Options
If you’re familiar with 401(k) plans, you’ll notice that both 403(b) and 457(b) plans offer a more limited menu when it comes to investment options. However, both typically offer annuities and mutual fund options.
At My State Pension, our network of licensed agents and registered investment advisors will guide you through the details of 403(b) and 457(b) plans. We can help you decide your best contribution options, which portfolios to select within each plan, and provide guidance on whether you should consider other options like an individual retirement account (IRA) after maxing out your employer’s contribution.
Allow Us to Help
Our job is to help you sort through and provide counsel regarding the complexity of your available retirement options. Contact us today and we’ll connect you with a licensed agent or registered investment advisor from our network that specializes in the unique needs of public sector employees like you.