While both 457(b) and 403(b) plans offer tax-advantaged retirement savings for employees of government or non profit organizations, there are vital distinctions.
A 457(b) plan is designed to help individuals save for retirement under the IRS (Internal Revenue Service) guidelines. It’s offered explicitly to employees of state or local government. This includes firefighters, municipal employees, and workers of specific non-profit Organizations qualifying under IRS Section 501(c)(3) (tax-exempt organizations)
On the other hand, a 403(b) plan is also a retirement savings account and works under the IRS guidelines. It is usually offered to employees of tax-exempt organizations only including schools, charities, churches, and religious institutions. 403(b) plan benefits employees of private not-for-profit organizations, or public schools. These include teachers, administrators, nonprofit hospitals, religious organisations, charities, and private educational institutions.
Employees can defer taxes on contributions to any of both plans until retirement. Although these plans share similarities, there are key differences too.
Comparison 403(b) Vs 457(b)
The main difference in eligibility is in eligibility criteria. 457(b) is for government servants only whereas, 403(b) is for non profit organizations. Let’s see what makes one eligible for both plans.
1. Eligibility Criteria For 403(b) And 457(b) – Dual Eligibility
Some employees may be eligible for both plans if they work for a qualifying employer. This is called dual eligibility. For example, a public school employee working for a state government or nonprofit organization. In such cases, they can contribute to both plans, potentially maximizing their retirement savings.
2. Contribution Limits
The essential contribution limit for 403(b) and 457(b) plans is the same. An account holder can contribute up to $23000 per year (up to $46000 with dual eligibility) in 2024.
Moreover, if you are 50 or above, you can save more by contributing a catch-up amount to both plans. The catch-up contribution is limited to $7500 per year ($15000 per year with dual eligibility) in 2024.
Pre Retirement Catch up For 457(b)
Some 457(b) plans offer a unique catch-up contribution. The pre retirement catch up allows you to contribute up to twice the usual annual contribution limit in the three years before you retire. It helps you to maximize your savings when it matters most.
Catch-up contributions are always conditional. They depend on your past contributions(deferrals). If you started late contributions, most plans allow you to catch up to reach optimum savings potential for the advanced years of your life.
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15 Year Catch up Contribution – 403(b) Vs 457(b)
Unlike 457(b), certain 403(b) offer additional contributions only after 15-plus years of continued service. According to IRS rules, this additional contribution is only allowed for employees of qualified sponsoring organizations who do not contribute more than $5000 annually. They can save $ 3,000 annually for five years ($ 15,000 in additional catch-up contributions is allowed).
Catch Up Contribution For Dual Plan Holders
The pre retirement catch up provision cannot be used simultaneously with the Age 50+ Catch-up contribution, which allows participants aged 50 or older to make additional contributions above the regular limit.
Participants must choose between the two catch-up options. Generally, the Pre-Retirement Catch-up offers a higher contribution limit and is often the preferred choice for those eligible to save more.
3. Withdrawal Rules of 403(b) and 457(b) plans
The best part is that 457(b) plans do not penalise early withdrawal when quitting your services with the organization sponsoring your 457(b) plan. You can opt to withdraw your savings without undergoing any damage.
Moreover, with the 457(b), you can cash out your savings if you have less than $5000 total in your savings accounts and you have not contributed to your retirement savings in the last two years.
4. Withdrawal Drawbacks & Flexibility – 457(b) Vs 403(b)
457(b) plan does not allow financial or emergency based withdrawals when the plan sponsoring employer employs you. To explain it more, unlike 403(b), where you can take a loan or hardship withdrawal, 457(b) usually does not permit withdrawals while employed unless you meet certain criteria. It does not even allow during-service distribution of savings, even in case of major health issues such as disability.
On the other hand, early withdrawals (before age 59.5 or other than some exemptions) from 403(b) saving plans, can cost you a damaging penalty of 10% deduction from your savings. 403(b) does offer in-service financial emergency based distribution and disability withdrawals of funds to the members.
5. Loans in 403(b) and 457(b)
Most 457(b) plans do not include a loan-providing feature; exceptions exist. Typically, you cannot borrow money from your account. With most plans, you need access to the funds before retirement, and you would generally need to take a withdrawal(fulfilling requirements). As mentioned earlier, your withdrawal will be subject to income tax, not a penalty.
Many 403(b) plans offer the option to take out a loan against your account balance. Typically, you can borrow whichever is less than 50% of your saved amount or $50000. The 403(b) loan allowances depend on the plan provider and your employer’s guidelines.
Frequently Asked Question
Can someone have 403(b) and 457(b) plans together at same time?
Yes, employees of non profit organziations that are public institutes too and fall under local, state or federal government can contribute to both 403(b) and 457(b) plans simultaneously.
Which is better regarding withdrawal, 403(b) or 457(b)?
457(b) is better if you need funds way before retirement. It has withdrawal flexibility without penalty but look at the employer’s rules for withdrawal. 403(b) is suitable for growing your savings and allowing you to withdraw in emergencies only (including health, home or education expenses). Otherwise, a 10% penalty will be imposed.
Which is better regarding contributions, 403(b) or 457(b)?
403(b) might be better when prioritising tax deferral and long-term growth. Withdrawal limitations and penalties in 403(b) allow long-term growth. An additional contribution option is another plus.
Is rollover of funds allowed in 403(b) and 457(b)?
Yes, both 403(b) and 457(b) plans allow rollover to another 403(b), a 401(k), or an IRA, with a direct transfer to avoid taxes and penalties is possible. However, 457(b) allows withdrawal, too, during rollover without penalty.
