Of the many accounts out there, employers may offer certain specialized retirement options such as 403(b) and 457(b) plans. Despite the similarities between these two accounts, the plans vary in availability as well as benefits. Here, we’ll discuss the differences between a 403(b) and 457(b), taking a closer look to see how the two retirement plans work.
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403(b) Plan
A 403(b) is a type of retirement plan designed for teachers, ministers, or non-profit organization employees to help supplement their retiree pensions and savings. 403(b)s are only offered to these fields due to their plan flexibility to adjust for changing needs and contribution freedom for members’ comfort.
Upon joining a 403(b) plan, employees can opt to defer a part of their salary to up to $20,500 as of 2022. Employers can match these contributions up to a total of $58,000, which go into either mutual funds or annuity contracts.
Some 403(b)s also allow further contributions—or “403(b) catch-up” contributions—up to $3,000 per year for employees 50 or older and employed with an organization for over 15 years. As a result, participants can save up to $15,000 in contributions towards their retirement. Other plans offer the more familiar 401(k) style catch up of $6,500 a year. Participants can defer on a pre-tax basis or pay taxes now to avoid paying taxes later with a Roth 403(b) account.
457(b) Plan
A 457(b) is a tax-advantaged retirement plan limited to state and local government or non-profit officers where a percentage of an employee’s salary is deducted and contributed to their plan each pay period. Applicable government members for a 457(b) plan include police officers, firefighters, municipal employees, and executives of hospitals, charities, or unions.
457(b) plans have similar offer contribution limits to 403(b) plans, which in 2022 allow $20,500 for those under 50 and $27,000 for members 50 and older.
Unlike 403(b), 457(b) long-standing participants can’t make catch-up contributions; instead, employees within 3 years of retirement age are offered the ability to make extra contributions up to twice the annual limit presently at around $41,000. 457(b) retirement plans offer the advantage of not coordinating with other plans, meaning if employers offer all three options 401(k), 403(b), and 457(b) then employees are able to deposit $20,500 and the possibility of multiple other contributions through these plans.
Although taxes and withdrawal penalties are similar to a 401(k), 457(b) often offer unforeseen emergency withdrawal options. Also, rollover options are more limited when a participant leaves employment.
403(b) vs 457(b): Find the Best Retirement Plan for You
Ultimately, your company and field of work dictates your choice of having a 403(b) or 457(b) retirement plan. Whether you work in a government office or educational institution, it’s more important than ever that retirees prepare their retirement plans to earn the best investments and benefits for the future. To learn more about 403(b) or 457(b) plan options, contact California Pensions and get started on designing your plan today.
