457 and 403(b) plans are retirement savings options designed for specific types of employees. While both offer tax advantages, they differ in eligibility, rules for withdrawals, and other features. Understanding these plans can help employees maximize their retirement savings.
457(b) Plan Overview
A 457(b) plan is available to employees of state and local governments, as well as some non-profits. It allows participants to contribute pre-tax income, reducing taxable income for the year, with tax-deferred growth.
Pros of 457(b) Plans
- No early withdrawal penalties: Participants can withdraw funds before age 59½ without the typical 10% penalty if they leave employment.
- Catch-up contributions: Within three years before retirement, participants can contribute up to twice the annual limit.
- Dual contributions: Can contribute to both 457(b) and other retirement plans like a 403(b) in the same year.
Cons of 457(b) Plans
- Limited investment options: Often restricted to funds chosen by the plan sponsor.
- Employer restrictions: Not all employers allow rollovers or loans.
- Lower availability: More common in government jobs and less available to private employees.
403(b) Plan Overview
A 403(b) plan, also known as a tax-sheltered annuity (TSA), is available to employees of public schools, hospitals, and certain non-profit organizations. It offers pre-tax or Roth contributions with tax-deferred growth.
Pros of 403(b) Plans
- Roth option: Offers a Roth 403(b) for after-tax contributions with tax-free withdrawals in retirement.
- Higher contribution limits: The same contribution limits as 401(k) plans, with potential employer matching.
- Wide eligibility: Available to many employees in education and healthcare sectors.
Cons of 403(b) Plans
- 10% early withdrawal penalty: If funds are withdrawn before age 59½ (unless an exception applies).
- Investment limitations: Traditionally limited to annuities and mutual funds.
- Loan availability varies: Not all employers offer loans against the plan balance.
Differences Between 457(b) and 403(b) Plans
Contribution Limits for 2024
- 457(b) Plan Limit: $22,500 (or $45,000 during catch-up period)
- 403(b) Plan Limit: $22,500 (plus $7,500 catch-up for age 50+)
- Dual Contributions: Employees can contribute to both plans for a total of $45,000 in a year (without catch-ups).
Can You Roll Over to Roth IRA or 401(k)?
- 457(b):
- Can roll over into Roth IRA or 401(k) if the plan allows.
- If rolled into a Roth IRA, taxes are due on the amount converted.
- 403(b):
- Can roll over to a 401(k), IRA, or Roth IRA.
- Rolling into a Roth IRA requires paying income taxes on the conversion.
Distribution Rules
- 457(b) Plan:
- No early withdrawal penalties if separated from service.
- Required Minimum Distributions (RMDs) begin at age 73 (as of 2024).
- 403(b) Plan:
- Withdrawals before age 59½ incur a 10% penalty (unless exceptions apply).
- RMDs also begin at age 73.
Can Employees Contribute to Both Plans?
Yes, employees who are eligible can contribute to both a 457(b) and a 403(b) plan in the same year, up to the respective limits. This strategy can significantly boost retirement savings potential, with a combined annual contribution of $45,000 (or more with catch-up contributions).
-Nguyễn Bách Khoa-
Resources for Further Reading
- IRS Website on Retirement Plans
IRS: Retirement Topics – 457(b) Plans
IRS: Retirement Topics – 403(b) Plans - Investopedia
457(b) Retirement Plan Overview
403(b) Retirement Plan Overview - Employee Benefit Research Institute (EBRI)
EBRI Publications on Retirement Plans
This overview provides the key differences, benefits, and considerations for 457(b) and 403(b) plans. Choosing the right plan, or contributing to both, can enhance retirement security, especially for employees working in education, healthcare, and government sectors.