Key Differences Between 457 and 403(b) Retirement Plans: Which One Suits You Best?
In the past, government and nonprofit jobs often came with guaranteed pensions. Today, retirement savings plans like the 457 and 403(b) are more common. These plans give public-sector and nonprofit employees flexible options to prepare for retirement.
Key Takeaways:
- Public and nonprofit workers often have 457 or 403(b) plans instead of 401(k) plans.
- The 457(b) plan is for state and local government workers, while the 457(f) is for executives in nonprofits.
- 403(b) plans are common for nonprofit and public education employees.
- Some workers can contribute to both types of plans at the same time.
457 Plan:
The 457 plan comes in two types: 457(b) and 457(f).
457(b) Plan:
In 2024, participants in the 457(b) plan can contribute up to $23,000. People aged 50 or older can add another $7,500 as a “catch-up” contribution. Under the SECURE Act 2.0, individuals aged 60 to 63 can contribute up to $10,000.
If you’re within three years of retirement, you can contribute up to $46,000, but only if you haven’t used your full contribution limits in previous years.
457(f) Plan:
The 457(f) plan is for high-level executives in nonprofits. It offers deferred compensation without immediate taxes, but there are strict conditions. To get these benefits, employees must stay with the organization for a set time and meet specific goals. Only after meeting these conditions does the deferred income become taxable.
Pros and Cons of 457 Plans:
Pros:
- Participants close to retirement can double their contributions.
- Catch-up contributions start at age 50.
- 457(b) benefits are available when you leave your job.
- You can roll over funds into a Roth IRA or 401(k).
Cons:
- Employer contributions count towards your maximum contribution.
- Few employers offer matching contributions in 457(b) plans.
- If you leave early, you lose 457(f) benefits.
403(b) Plan:
The 403(b) plan is for nonprofit and public school employees, as well as some ministers. It works like a 401(k), letting participants save for retirement on a tax-deferred basis.
Introduced in 1958, the 403(b) plan was originally limited to annuity contracts. Now, it offers a range of investment options, though the annuity link remains.
403(b) Contribution Limits:
The contribution limits for 403(b) plans are the same as for 401(k) plans. All deferrals are made before taxes, reducing your taxable income.
Conclusion:
Understanding the differences between the 457 and 403(b) plans helps you choose the best option for your financial future. Whether you work in the public or nonprofit sector, these plans offer flexible ways to save for retirement.
