457 vs 403b

Updated on April 4, 2024
Article byMelvin Sewak
Edited byMelvin Sewak
Reviewed byDheeraj Vaidya, CFA, FRM

Difference Between 457 and 403b

457 plans offered to employees that work under state and local government or non-profit organizations. It requires the employees to work until a designated period, while 403b plans are offered to employees working under government, public schools, or private non-profit organizations. Here, the money is sheltered for 15 years.

Retirement plans come in various forms that employers can provide as a benefit to their employees, falling into one of two major categories: Defined Benefit plans or Defined Contribution plans. Most companies will opt for a Defined Contribution plan, which provides control for the employees. For example, 403b and 457 are two employer-sponsored plans.

Let us discuss 457 vs. 403b plans and what they offer for the future.

What is a 403 (b) Plan?

  • 403(b) was created in 1958 and was known as Tax-Sheltered Annuities (TSA) or Tax-Deferred Annuities (TDA), as, at that time, they were only allowed to invest in annuity contracts. It is mostly offered by academic institutions, although any entity can use it under IRS Section 501(c)(3).
  • They have a contribution limit similar to 401(k), but 403(b) offers a lifetime catch-up provision or a 15-year rule, allowing employees who have served for at least 15 years or contributed less than or equal to an average of $5,000 per annum. They are allowed to invest $3,000 more per annum.
  • With changes over time, it allows the employees to take their plans to their new employers if they do not roll them over into another qualified plan. The IRS applies the limits in the following order for individuals: the elective deferral, then the 15 years’ service catch-up provision, and finally, the age 50 catch-up contribution.
  • Suppose the distribution happens before the age of 59.5 years. In that case, an early withdrawal penalty of 10% is levied while all normal withdrawals are taxed similarly to regular income as per the person’s top marginal tax rate. Also, a mandatory minimum distribution should begin at the age of 70.5 years, or it may attract an excise tax of 50% on the amount that one should have withdrawn.
  • Employees are also allowed to avail of a loan equivalent to the lesser amount of $50,000 or half of the plan balance. After much leniency in the investment rules, it can invest directly into mutual funds, but securities like stocks or REITs are still not allowed.
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What is the 457 Plan?

The 457 plan comes in two variants 457(b) and 457(f). Most local and state government employees offer a 457(b) plan, whereas highly paid non-profit employees offer a 457(f) plan.

  • 457(b): The contribution limit is $18,500 per annum, and if your age is more than 50 years, you are also allowed to contribute an additional $6,000. Also, if you are close to within three years of the normal retirement age, you can contribute up to $36,000. It also comes with a catch-up option. It allows rollover like a 403(b) plan.
  • 457(f): This plan is mostly offered to an organization’s selected group of employees and requires them to work until an agreed-upon tenure. If they leave before that time, they are not entitled to any right on the 457(f) plan. It allows you to contribute 100% of the income and provides a lucrative feature while recruiting talented personnel. It does not allow any rollovers.

457 vs 403 b Comparative Table

Basis457403(b)
DefinitionIt is a bi-variant plan offered to people in government jobs or non-profit organizations, with 457(b) being more liberal than 457(f).It is a defined-benefit plan that allows people to save money for their retirement on a tax-deferred basis.
ContextIt is mainly offered to local or state government employees or highly paid employees of non-profit organizations.It is mainly offered to employees working in academic institutions.
TypesIt comes in two variants: 457(b) for local and 457(f).There are no sub-section or variants to this plan.
Usage457(f) is a recruiting tool while hiring talented employees.It is an additional retirement saving scheme with benefits similar to 401(k).

Conclusion

The plan you choose depends on the company or the organization you work for. You may have little control over the investment options offered by your employer, but both plans offer the benefit of saving for the rainy days through 457b and 403b and are very similar to each other.

Also, there are many things to consider while investing in the future. Hence, one should plan, reach, and execute based on risk appetite and income. If eligible, one should try to max out the savings limit in both plans to save big time for retirement to secure a future with at least one less to worry about.

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