403b vs 457b

When it comes to retirement, the more you plan and save for it, the easier it will be.

You can choose from a number of savings plans that offer tax advantages as well as matching funds – all in an effort to accumulate money more quickly and allow you to retire comfortably.

To save up for retirement, one may tap on employer-sponsored and tax-favored retirement savings plans.

There are a number of these plans, each with their own contribution limits and rules.

One such example is the 403b plan and 457b plan – which both offer different benefits that will help you plan for retirement.

Let’s take a look at a comparison of the two to help you decide on which best suits your needs.

What Is the 403b Plan?

The 403b plan is a non-profit organization’s version of a 401k and is aimed at encouraging workers to put aside part of their salary on a pre-tax basis for retirement savings.

Contributions are made directly from payroll deductions and gifted by employers, which makes this plan particularly appealing since “employees’ contributions come out before taxes are taken out.”

The annual contribution limit for 403b plans is $19,500 for the year 2021.

Pros and Cons of the 403b Plan

One of the benefits that comes along with the 403b plan is that employees get to defer a portion of their income before taxes are taken out. This means that there’s a little less money to spend during the year but more money put aside for later use.

Also, employers typically match a percentage of contributions so you get free money from your employer.

However, the drawback of this plan is that employees will have fewer investment options. So far, this type of plan offers only variable annuities.

Another drawback is the high fees associated with the plan which can lower profits.

Also, just like IRAs and 401ks, there is a 10% early withdrawal penalty for 403b plans if an employee is below 59 1/2 years old upon withdrawal of funds.

What Is the 457b Plan?

A 457b plan is another employer-sponsored savings plan that is similar to the 403b in the sense that it has tax advantages  and is employer-sponsored.

However, there are some differences between these two types of plans.  

For example, with a 457 plan, an individual does not need to worry about meeting certain requirements for eligibility or receiving matching funds from their employer.

With this type of retirement savings plan, you can defer part of your paycheck pre-tax and put money into an account until you’re ready to use it.  This money will go towards paying for your living expenses in retirement (such as rent or mortgage payments).

You must be at least 18 years old to contribute to a 457b savings plan.  Your employer must sign you up for the plan and contribute to it as well, but this is usually at their discretion.

Pros and Cons of a 457b Plan

One benefit that comes along with the 457b plan is that no penalties will be imposed when you need to withdraw funds from the plan even when you are below 59 1/2 years old.

Another benefit is that in the event that you need to leave your job or be under another employer, you have the option to roll over your account into a Roth IRA or 401k.

A drawback of the 457b plan is that there are less matching programs available for it. Thus, employees have to take the responsibility to look after their savings.

What to Choose Between the Two

So what should you consider when deciding between a 403b or 457b retirement savings plan?

The best way is to first look at your goals for using the money in these accounts and how much you can contribute each year.

If you are limited to how much you can contribute, then it may be better for you to choose a less restrictive 457b plan instead of taking advantage of all possible employer contributions with a 403b plan if not currently eligible.

In most cases, if you have access to both types of plans from your current employer, it’s recommended that you contribute enough to receive the maximum match offered by your company.

Also, if you are nearing retirement, a 457 plan may be better compared to the 403b plan because its catch-up policy is more flexible.

Retirement savings plans are aimed at helping individuals save money to fund their own retirement. These plans come in different forms, such as 401ks and IRAs, but many employers also offer retirement contribution plans for employees, such as 403b and 457b plans.
If your employer doesn't offer either plan, then you may want to consider opening up an IRA on your own. You can simply set this account up at any of the many discount brokers on the market today.
If you are employed, chances are that your company provides you with a 403b or 457 plan. These plans typically offer tax shields if they are set up correctly. Thus, it is important for employees to understand the differences between these two types of plans so they can make appropriate decisions on how they would like their retirement savings to be allocated.
The 457 plan is best suited for people who need more flexible access to their money than what is offered by the 401k and traditional IRA accounts. People often choose this over the SEP IRA because of its higher annual contribution limit (under age 50) as well as catch-up contributions. Due to the high contribution limits, this type of account is often more accessible than an IRA.
Both types of plans offer tax-deferred savings for employees. They both have similar eligibility requirements that must be met in order for a person to open one up.
True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True contributes to his own finance dictionary, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, his interview on CBS, or check out his speaker profile on the CFA Institute website.