Public-sector employers and other qualifying organizations can offer 403b and 457 plans. Find out about these plans and which might be right for you.
Many people are familiar with 401k plans. These are employer-sponsored retirement plans. If you’re a qualifying employee, you can defer part of your paycheck before taxes into these plans, and in certain cases, your employer may match some of your contributions.
However, public-sector organizations at the state and federal levels, such as schools, can’t generally offer new 401k plans. That doesn’t mean public-sector employees are left without employer-sponsored retirement savings options. Two common options are 403b and 457 plans. Keep reading to learn more about 403b vs. 457b plans, including the differences between the two and the contribution limits for each.
The 457 Plan
One of the first options for public-sector employers is a 457 plan, of which there are two types. To qualify for a 457 plan, you have to work for a state or local government; these plans can’t be offered by federal employers.
457b Plan
There are two types of 457b plans: governmental and tax-exempt plans. Governmental 457b plans can be sponsored by state or local governments or certain political agencies. Tax-exempt 457b plans can be sponsored in certain situations by employers that aren’t state or local governments or political agencies but are tax-exempt organizations, but these plans are only for highly compensated employees or those in high levels of management.
Governmental 457b plans allow participation from any qualifying employee or independent contractor of the employer. Contributions to these plans are not taxed; the money is taxed when it is disbursed during retirement or due to another event.
Some events that allow you to receive distributions from a 457b plan include:
You turn age 70 1/2 and required distributions kick in.
You turn age 59 1/2 and can take optional distributions.
You have a qualifying emergency or hardship.
The plan terminates or you are no longer employed with the sponsoring employer (you can roll over your savings into an IRA, 401k, 403b, or another 457b plan).
Distributions from 457b plans don’t come with early withdrawal penalties like those from 401k plans do. However, if you roll non-457b funds into a 457b plan — such as from a 401k plan — and withdraw those funds early, you may have to pay the penalty on them.
457f Plan
The 457f plan is an option for non-taxable entities that aren’t local or state employers. This plan is also only available for upper management or those receiving high compensation. The purpose of these plans is usually to provide a retirement perk for executive-level employees.
457b Plan Contribution Limits
As with other tax-deferred retirement plans, 457b plans come with contribution limits. Every year, you can only defer up to a certain amount of your salary into a 457b plan before taxes, and how much that is depends on your age and how close you are to retirement.
For most people, the contribution limit for 457b plans in 2022 is $20,500. That can include your entire salary if it is $20,500 or less. Contribution limits can change annually. In 2020 and 2021, they were $19,500. Note that with this type of plan, employer matching amounts count in this total.
The IRS allows older people who are catching up on retirement contributions to make higher annual contributions into their 457b plans. There are two situations when extra contributions are allowed:
When you are in the final three years prior to retirement age. In this case, as of 2022, you can contribute up to $41,000 per year to a 257b plan.
If you are age 50 or older and want to make catch-up retirement contributions. In this instance, as of 2022, you can contribute up to $27,000 per year in total.
The 403b Plan
Also called tax-sheltered annuity plans, 403b plans can be used by:
Certain types of ministries, churches, or ministers
Qualifying 501(c) tax-exempt organizations
Public education organizations
States with regard to public school employees
If an employer sets up a 403b plan, all eligible employees of that organization can participate in the plan. As with 457b plans, contributions to 403b plans under the annual threshold are made before federal taxes are deducted. That means the taxes are deferred until the person takes a distribution from the plan — typically, but not always, in retirement.
Distributions from a 403b plan can be taken upon any of the following events:
You turn 59 1/2 years of age (or anytime after that).
You become disabled and are no longer able to work or work at the same level.
You pass away and your 403b benefits transfer to your beneficiary.
You leave the employment of the sponsoring employer for any reason (in this case, you can roll your 403b funds into another qualifying retirement fund).
According to the IRS, employers that set up 403b plans are allowed to create parameters for hardship distributions as well as loans. Employers don’t have to do this, though, so it’s important to read the fine print of your 403b plan so you understand whether you can access the money without penalties prior to retirement age.
403b Plan Contribution Limits
Contributions to a 403b plan break down into several categories. First, there are elective deferrals. This is what most people mean when they talk about retirement plan contributions. You agree to have a certain amount of your salary — usually a percentage — withheld from your paycheck and put into the 403b account. This amount is withheld before taxes, which means the amount is not considered part of your income when making tax calculations (thus potentially reducing how much you owe in taxes).
Nonelective employer contributions refer to amounts the employer pays into the fund. This may be a match — for example, the employer may match up to 3% of your salary in contributions you make. It could also be part of a benefits structure that involves the employer funding a certain amount of retirement.
Once you meet the contribution limits for the year, you can continue to make after-tax contributions. These can help you build your retirement fund faster, but they don’t give you the benefit of tax deferral.
The IRS sets contribution limits for 403b plans each year. As of 2022, the general limit is $20,500 in tax-deferred contributions from an employee. Note that the total contribution from both employee and employer can’t exceed $61,000 per year.
Catch-up contributions are allowed for 403b plans. Those age 50 or older can contribute an extra $6,500 per year (as of 2022). If someone has 15 years of service with the same employer and the same 403b plan, they can also make catch-up contributions if desired. The catch-up amount allowed in this case is not more than $3,000. The amount may be lower than that depending on how many years of service the person has had and how much they’ve already contributed over the years.
Which Plan Should You Choose?
In some cases, you may not have a choice if you want to participate in an employer-sponsored tax-deferred retirement plan. You may only have the options that your employer has set up, and in that instance, you should consider whether there are benefits, such as a tax deferral and employer match, that make this a better fit than other options you might have.
However, if you can or need to choose between 403b and 457b plans, you’ll want to compare the pros and cons of each to better understand which is right for you.
Pros and Cons of 457b Plans
One of the biggest benefits of 457b plans is that you can gain access to your funds without any penalties as soon as you no longer work for the employer, once you hit retirement age, or if you have a qualifying emergency.
These plans also typically offer the ability to catch up on retirement savings during your latter working years, as you can double your contributions in the final three years. Plus, you get the standard catch-up contribution opportunities as soon as you turn age 50. If you have a 457b plan, you can roll funds into a qualifying 401k or Roth IRA if you leave your current employer and don’t want to take funds distribution at that time.
On the downside, any amount your employer contributes counts toward the applicable contribution limits. Great match scenarios also tend to be somewhat less likely with 457b plans, so it may be more difficult to maximize your retirement savings with these options.
Pros and Cons of 403b Plans
You can typically have a higher annual contribution with a 403b plan if your employer makes contributions too. That’s because the employer contribution is tracked separately and doesn’t count toward the contribution limits you can make. For example, in 2022, the general maximum contribution employees can make into a 403b plan is $20,500. However, you and your employer together can contribute a total of $61,000 annually.
While you can contribute catch-up contributions to a 403b plan, the 457b plan catch-up allowances may be higher in some cases. You can also only access funds in a 403b plan prior to age 59 1/2 if your employer sets up the plan with emergency withdrawal or loan options.
Choosing the Right Plan for You
If you want to put more money away for retirement and you’re in the later years of your career, the 457b plan’s catch-up contribution limits are more attractive. However, if your employer offers a good match, you may be able to maximize contributions better over time in a 403b plan.
Can You Have Both a 403b and a 457b?
Yes, in some cases, you can have both a 403b and a 457b plan. This is possible when an employer offers both types of plans and lets you make contributions to both.
One benefit of having both types of plans is that you can maximize your contributions for retirement by meeting the limits for each plan. You also get to benefit from the pros of each plan type while mitigating some of the cons or risks by diversifying your retirement savings.
Our Take
The right retirement plan for you is a personal decision, and you need to consider factors such as the options your employer offers, your ability to make contributions, and your financial goals now and in the future. In many cases, a single retirement fund isn’t enough to support success in the future, and you may also want to consider investment and wealth-building opportunities outside of funds offered by your employer when you’re embarking on retirement planning.
Get started with Personal Capital to learn about your options and start managing your entire financial life for a more financially informed future.