There are different accounts available to help you save for retirement, including a 457 and 403(b). You may be able to contribute to one or both if you meet the eligibility requirements and work for a nonprofit, government or tax-exempt organization that offers each type of retirement account. While there are some similarities between the two, there are also differences. Understanding what’s involved with a 457 and 403(b) can be helpful as you decide which is best for your situation and retirement goals.
When comparing a 457 and 403(b), you’ll find:
- Both are retirement accounts geared toward government and nonprofit employees.
- You may be able to contribute to one or both.
- There are different advantages that come with each type of retirement account.
- You can contribute more if you are closer to retirement and meet specific criteria.
What Is a 457?
A 457 is a retirement account made available by certain employers to their workers. “The 457 accounts are offered primarily to individuals who are employed at a local or state government agency,” says Tyler Abney, a certified financial planner and co-founder of Tidemark Financial Partners in San Diego, California. Some nonprofit employers also provide this type of plan. Participants make contributions which are allocated into investments and are eligible for tax benefits.
What Is a 403(b)?
A 403(b) plan is a retirement account that allows employees to save for the future. Workers can make tax-deferred contributions into the plan, and some 403(b) plans also offer an after-tax Roth option. “403(b) accounts are primarily offered to individuals employed at private and nonprofit organizations such as public schools, hospitals and charities,” Abney says. Teachers, ministers, government employees, medical professionals and library personnel might find this plan available through their organization.
Similarities Between 457s and 403(b)s
Both plans offer tax benefits that can be helpful for those saving for retirement. “For a traditional 403(b) and a 457 plan, an employee is able to save money to their retirement account pre-tax and invest that savings inside of their retirement plan without paying tax on the gains or interest earned as long as it stays within the retirement account,” says Matthew Crum, president and founder of True North Financial Services in Morris Plains, New Jersey. “When the employee is retirement age and starts to withdraw savings from their retirement account, they would pay income tax on only the savings withdrawn from the account.” In addition to the traditional option, both plans can offer Roth contribution options. Through a Roth, contributions are made with after-tax money and the later withdrawals are tax-free.
Both the 457 and 403(b) have the same annual contribution limits. These are the lesser of an employee’s total compensation for the year or $20,500. They also offer the same standard catch-up provision for employees who are age 50 and older. This catch-up amount can be up to $6,500 in 2022.
Differences Between 457s and 403(b)s
Matching contributions from employers are not treated the same way in these plans. With a 403(b), the employer match is independent of employee contributions and does not count toward the maximum contribution of the employee. Under a 457, all employer contributions count toward the worker’s maximum contribution. “It is for this reason that if an employer offers both types of plans, any matching contributions are almost always applied to the 403(b) and not the 457,” says Wayne Brown, a retirement consultant at Dugan Brown, a retirement planning firm in Dublin, Ohio.
Taking out penalty-free withdrawals from a 457 is different than withdrawing without penalties from a 403(b). “In the case of 457s, one may take penalty-free withdrawals at any age, so long as the participant has left their job or has a qualifying hardship,” Brown says. With a 403(b), penalty-free withdrawals can be taken after you turn age 59 1/2 or after separating from service during or after the calendar year in which you turn 55 (or 50 for public safety employees).
While both plans allow for the annual catch-up contributions of $6,500 in 2022, they have different extra catch-up options. With a 457 plan, if you are within three years of your normal retirement age as defined by your plan, you may be able to make extra contributions. With a 403(b) plan, you can contribute an additional $3,000 each year if you have worked for the organization for more than 15 years, up to certain lifetime limits.
Can You Save in a 457 and a 403(b)?
Due to the design of these retirement accounts, some employers such as public universities may offer both types of plans. “Employees are able to participate in both a 457 and a 403(b) plan at the same time, and contribute the annual maximum to both,” Crum says. For instance, a worker age 50 or older who is eligible to participate in both plans could contribute $20,500 to each plan and make a catch-up contribution of $6,500 to each, for a total retirement savings of $54,000 in 2022.
How Do You Choose Between a 457 and a 403(b)?
If you have the option to save in a 457 or a 403(b), you might select one or both plans. When debating contributing to both, you could first check for employer contributions. If they are made to one of the accounts, you may prioritize that account. “While both 457 and 403(b) plans allow matching employer contributions, in practice, 403(b) plans more commonly offer an employer match to encourage employees to save for retirement,” Crum says.
You can also calculate how many years you will be saving until retirement. “It is worth considering the time horizon of the investment,” Brown says. If you know you will be able to retire by your late 40s, a 457 would provide penalty-free access much earlier than a 403(b).
The amount you’re interested in contributing can be weighed as you make your decision. “If you’ve been at your employer for over 15 years, a 403(b) plan will allow you to make bigger contributions,” Abney says. “If you are closer to your normal retirement age, a 457 plan may be better for bigger contributions.”
