Difference Between 403(b) and 457 Plan

By StephOn August 6, 2022August 6, 2022

403(b) Plan

A 403(b) plan is a retirement savings plan that is offered by many public schools and non-profit organizations. Employees can contribute money to the plan on a pre-tax basis, and the money grows tax-deferred until it is withdrawn in retirement. Employers may also make matching or discretionary contributions to the plan on behalf of employees. There are several key features of a 403(b) plan that make it an attractive retirement savings option for many people:

contributions are made on a pre-tax basis, which reduces your current taxable income and can result in significant tax savings;

The money in the account grows tax-deferred, which means you won’t owe any taxes on the investment earnings until you withdraw the money in retirement;

Employer contributions (if any) are also made on a pre-tax basis, which further reduces your taxable income; and

403(b) plans often have lower fees than other types of retirement savings plans.

If you are eligible to participate in a 403(b) plan, it can be a great way to save for retirement. Be sure to compare the features of different plans before you decide which one is right for you.

457 Plan

A 457 plan is a retirement savings plan that is sponsored by an employer. Employees can contribute to a 457 plan on a pretax or after-tax basis. Employers may also make contributions to their employees’ 457 plans. 457 plans are similar to 401(k) plans in that they both offer tax-deferred growth of investments and allow employees to make contributions on a pretax basis. However, there are some key differences between the two types of plans. For example, 457 plans do not have the same early withdrawal penalties as 401(k) plans. This means that employees can access their 457 plan funds before retirement age without incurring a 10% penalty.

Another key difference is that 457 plans are not subject to the same annual contribution limits as 401(k) plans. This means that employees can contribute more money to their 457 plan on an annual basis than they could to a 401(k) plan. Lastly, employer matching contributions are not allowed in 457 plans. This means that employees will not receive any employer contributions to their 457 plan account.

Despite these differences, 457 plans can still be an effective retirement savings tool for employees. If you are considering opening a 457 plan, be sure to talk to your financial advisor to see if it is right for you.

Key Similarities

There are several key similarities between 403(b) plans and 457 plans. First, both are retirement savings vehicles designed for employees of public schools and non-profit organizations. Second, both offer tax-deferred growth of investments. And finally, both allow for catch-up contributions for those age 50 or older.

Key Differences

When it comes to retirement savings plans, there are a few different options available to employees. Two of the most popular types of plans are 403(b) and 457 plans. So, what’s the difference between them? For starters, a 403(b) plan is offered by nonprofit organizations, while a 457 plan is offered by state and local governments. Both types of plans offer employees the ability to save for retirement on a tax-deferred basis, but there are a few key differences between them.

One of the biggest differences is the contribution limit. With a 403(b) plan, employees can contribute up to $18,000 per year (or $24,000 if they’re over the age of 50). With a 457 plan, the contribution limit is much higher – employees can contribute up to $36,000 per year (or $48,000 if they’re over the age of 50). Another difference is that 403(b) plans typically have more investment options than 457 plans. This is because 403(b) plans are offered by a variety of different organizations, each with their own investment options. 457 plans, on the other hand, are usually offered by state and local governments, which tend to have more limited investment options. Finally, there’s a difference in how withdrawals are taxed. With a 403(b) plan, withdrawals are taxed as ordinary income. With a 457 plan, however, withdrawals are subject to special tax rules – they may be taxed at a lower rate or even be tax-free if they’re used for certain qualified expenses. So, which type of plan is right for you? It depends on your individual situation. If you’re looking for a higher contribution limit, then a 457 plan may be the better option. If you’re looking for more investment options, then a 403(b) plan may be the way to go. And if you’re concerned about how withdrawals will be taxed, then you’ll need to evaluate both types of plans to see which one is better for your specific situation.

What are contribution limits of 403(b) vs 457 Plan?

The maximum amount an employee can contribute to a 403(b)or 457 retirement plan for 2022 is $20,500, up $1,000 from 2021. Those who are or will be 50 years or older in 2022 can contribute an additional $6,500 as a catch-up contribution, bringing the total max contribution to $27,000.

457 vs 401K Plan

There are a few key differences between the 457 and 401K plans that you should be aware of before making a decision about which one is right for you. The 457 plan is sponsored by your employer, whereas the 401K is an individual retirement account that you set up and contribute to on your own. The 457 plan has a higher contribution limit than the 401K, meaning you can save more money each year. The 457 plan also allows you to take out loans against your account balance, which is not an option with a 401K. Finally, the 457 plan is subject to state taxes, whereas the 401K is not. So, which one is right for you? It depends on your individual circumstances and what your priorities are. If you want to save as much money as possible for retirement, the 457 plan is a good option. However, if you’re more concerned about having access to your funds in case of an emergency, the 401K might be a better choice. Talk to a financial advisor to get more personalized advice.

Resources

Comparing the 403(b) SRA and 457(b) Plans

Does 403(b) + 457(b) = the right equation for your retirement strategy?

Tax-Deferred Compensation/Annuity Plans 457(b) & 403(b)