457 Plan vs. 403(b) Plan: What’s the Difference?
Updated November 16, 2023
Retirement saving plans can look a lot like alphabet soup—and for those who work in the public sector, there are spoonfuls to consider beyond the IRA and 401(k).
People who work at non-profit organizations, public schools, and other government entities might find 457 plans and 403(b) plans in their mix of retirement options. Both of these plans can help pave the path for a stable financial future in retirement, but they do have some key differences to understand.
Because most employers only offer one or the other, chances are you won’t have to choose between contributing to a 457 plan and a 403(b). But if you do—or if you’re doing your research and evaluating potential benefits packages ahead of deciding on a job offer—here’s what you need to know.
The 457 plan
A 457 plan is a type of employer-sponsored retirement account available to some state and local government workers, as well as certain nonprofit employees. There are actually—yes, more alphabet soup—two different kinds of 457 plan: The 457(b) and the 457(f).
457(b) plans are the more common of the two, and can be offered to civil servants, nonprofit employees, and other state and local government workers. 457(f) plans are rarer, usually available only to high-level executives at certain non-profit organizations.
As with most other types of retirement plans, employees make contributions to the 457 plan, and these investments are allowed to grow tax-deferred. But 457s also have a few peculiarities that make them stand out from other retirement options.
Pros and cons of 457 plans
Let’s take a closer look at the ins and outs of 457 plans.
Pros
- High contribution limits. Like other types of employer-sponsored retirement accounts, 457 plans offer the benefit of high annual contribution limits: The max is $22,500 in 2023 ($23,000 for 2024) for a 457(b). And 457(f) plans don’t have an annual contribution limit at all: Plan participants can put as much of their paycheck into the account as they’d like. (That’s part of what makes them so attractive for those well-paid executives.) There is, however, a catch—which we’ll get to in just a minute.
- Special catch-up contributions may be available. When it comes to investing, time is key—so for those getting a start later in the game, the ability to add a little extra each year can go a long way. Most 457(b)s allow the standard catch-up contribution for those aged 50 and over, which is $7,500 in both 2023 and 2024. (That’s in addition to the base contribution limit listed above) But some plans allow for special, additional catch-up contributions in the last three years before you reach the plan’s retirement age: Up to double the annual limit (so, for 2023, $45,000, and $46,000 in 2024) or the normal annual limit plus eligible funds you could have contributed in past years, but didn’t. If your plan allows both the regular catch-up contributions and the special ones, you can choose the bigger one, but you can’t use both.
- Withdrawals are more flexible. Another special feature that’s pretty hard to find in other types of retirement accounts: Governmental 457(b) account-holders can withdraw funds without paying the 10% early withdrawal fee once they no longer work for the plan-sponsoring employer, even if they’ve yet to hit the no-withdrawal-penalty age—currently 59½. However, these accounts are still subject to required minimum distributions, or RMDs, which is to say you’ll be obligated to start withdrawing funds from the account once you reach age 72 or 73, depending on your birthday.
- You can easily roll it over. If you leave your job and don’t want to immediately cash in the account, your 457 plan can be rolled over into a wide variety of other types of retirement accounts, including an IRA, 403(b), 401(k), and others. (Pro tip: Keeping all of your retirement funds in just one or two accounts can help ensure you don’t leave money on the table or miss RMDs once you reach retirement age. Not sure if you’ve left an old 401(k) behind? A service like Beagle can help you find missing retirement accounts—and benefit from them).
Cons
- Only available through an employer. Which is to say, unlike an IRA, this isn’t an account you can just opt into on your own. You need to be employed by an organization in the public sector to have access to a 457 plan.
- Unlikely to see an employer match. In the private sector, many employers offer to match employee retirement contributions up to a certain percent of their wages—like 1% or 4%—to sweeten the deal. However, this kind of match is quite rare in the public sector, so your 457 plan will probably not come with one.
- Limited investment options. This is true of both 457 plans and 403(b)s, as we’ll see in a moment. Public sector retirement accounts usually only allow investors to choose from mutual funds and annuities. That structure leaves a whole lot of other options, like exchange traded funds (ETFs) and individual stocks and bonds, on the table—but fortunately, you can always choose to invest in these with a private, self-directed investment account through a brokerage like JP Morgan.
- In the case of 457(f) plans, you risk forfeit. Remember that catch we promised above? Well, in order for 457(f) contributions to be tax-deferrable, they must be subject to “substantial risk of forfeiture,” as the IRS puts it. In other words, if the employee leaves or loses their job before they’re vested in the plan, they’ll lose the money entirely. (In most other cases, you’d keep the money you’d contributed, but potentially lose out on employer contributions if you left before you were fully vested.)
The 403(b) plan
The 403(b) plan, sometimes also known as a tax-sheltered annuity or TSA plan, is a type of retirement account designed for those who work at public schools and, again, certain non-profit employees, like those who work at churches or charities. Employees contribute and employers can contribute on their behalf. In many ways, they work very similarly to a 401(k)—just for the public sector rather than the private.
Pros and cons of the 403(b) plan
While 403(b) plans are considerably less complicated than 457s, it’s still important to understand their benefits and drawbacks.
Pros
- Even higher contribution limits. At first glance, it looks like 403(b) plans have the same annual contribution limits as 457s: $22,500 for 2023 ($23,000 for 2024), with catch-up contributions allowed for participants who have celebrated their 50th birthday. But that’s just the annual limit to how much you, the employee, can contribute; including contributions from an employer match, which you’re more likely to see with a 403(b) than a 457, this year’s limit goes up to a whopping $66,000 ($69,000 in 2024).
- Special catch-up contributions may be available. They work a little differently than the 457’s, though. With a 403(b), plan participants aged 50 or over are eligible for the standard catch-up contribution—again, $7,500 for 2023 and 2024. But if you’ve worked with the organization for 15 years or longer and your plan allows it, your overall contribution limit may permanently increase by $3,000—or more, under certain circumstances.
- Easy to roll over. Just like a 457, a 403(b) plan can be rolled over into most other types of retirement accounts.
Cons
- Limited investment options. Just as with 457 plans, investment choices for 403(b)s are generally limited to either annuities or mutual funds.
- Early withdrawal penalties. As is true of most types of retirement accounts, with a 403(b), if you make a withdrawal before age of 59½, with very few exceptions, you’ll be subject to a 10% penalty. Exceptions to the rule include becoming disabled or being let go from your job. You may also be able to take a loan from your 403(b), but doing so may mean missing out on valuable investment growth during the period of the loan.
- Only available through employer sponsorship. And you have to work with the right kind of facility—again, usually a school, church, or other non-profit—to access one.
457 plans vs. 403(b) plans: Key differences
That was a whole lot of information, so let’s lay out the key differences between 457s and 403(b)s at a glance.
457 plan | 403(b) plan | |
---|---|---|
Who’s it for? | State and local government workers as well as certain non-profit employees | Public school workers as well as certain non-profit employees, including some clergy and charity workers |
Contribution limit for 2023 | $22,500, including both employee and any employer contributions | $22,500 for employee contributions; up to $66,000 including employer contributions |
Contribution limit for 2024 | $23,000, including both employee and any employer contributions | $23.000 for employee contributions; up to $69,000 including employer contributions |
Catch-up contributions | For those aged 50 and over ($7,500 for 2023 and 2024); In some cases, special catch-up contributions may allow participants to contribute double the annual limit, or contribute funds they were eligible to, but did not, contribute during previous years, during the three years immediately before the plan’s retirement age | For those aged 50 and over ($7,500 for 2023 and 2024); In some cases, special catch-up contributions may allow participants who’ve been employed by the same organization for 15 years or longer to increase their annual contribution limit by at least $3,000 |
Withdrawal penalty | Does not apply to withdrawals made after severance from employment, even before the no-withdrawal-penalty age of 59½ | Applies to most withdrawals made before age of 59½, with exceptions for death, disability, and severance from employment |
Investment options | Limited to mutual funds and annuities | Limited to mutual funds and annuities |
Required Minimum Distributions (RMDs) | Yes, starting at age 72 or 73, depending on your birthday | Yes, starting at age 72 or 73, depending on your birthday |
When is a 457 plan the right choice?
If you’re a government or non-profit worker who has access to a 457 plan, it can be a valuable tax-advantaged retirement savings vehicle—and one that offers some special bonus features and flexibility that can be hard to find in other retirement accounts.
Still, 457s don’t have the highest contribution limits, are seldom subject to employer matching and, in some cases, are subject to the risk of forfeiture. The good news is, you can contribute to a 457 plan while also contributing to another type of retirement account, like a 401(k) or IRA, as long as you follow the rules for all of them.
When is a 403(b) the right choice?
If you work at a public school, church, or non-profit and you have access to a 403(b)—you guessed it—contributing to the account could be a smart way to save for retirement. That’s especially true if you receive an employer match, which may make it more feasible to take advantage of 403(b) plans’ higher contribution limits.
Still, keep in mind that your investment options will be more limited with a 403(b) than with other types of retirement accounts, such as IRAs and even certain 401(k)s. Again, you can mix and match your retirement strategy in order to get the best of a few different types of investment vehicles.
Can you have both a 403(b) and a 457(b)?
While the answer is technically yes—there’s no clause stating you can’t have access to both a 403(b) and 457(b) at the same time—realistically, most employers only offer one type of account or the other. If you do have access to both types of accounts, you can contribute to each, but must keep the contribution limits and other rules in mind so as to avoid running into penalties.
TIME Stamp: 457 and 403(b) plans offer solid ways to save for retirement
Both 457 plans and 403(b)s offer those in the public sector valuable options for saving for retirement—with the additional bonus of higher catch-up contributions under certain circumstances or, in the case of the 457, more flexible withdrawals. However, both of these accounts are only available to those who can access them through their employer, which means not everybody can open one.
Fortunately, other options—for example, IRAs—are available to those who are self-employed or otherwise don’t have access to an employer-sponsored retirement account. Sometimes, a whole alphabet of options is a good thing.