403b vs. 457b: what’s the difference?
Discover the difference between 403b and 457b retirement savings plans for NPOs- and government employees.
Summary
403b and 457b are life insurance retirement plans for NPOs or government institution employees.
These plans differ in employer contributions, investment options, catch-up contributions, and withdrawal options.
The Secure 2.0 Act of 2022 includes pertinent changes to aspects of these plans.
A financial advisor can help you develop a retirement plan.
What is a 403b plan?
A 403b plan is a tax-sheltered annuity (TSA) for retirement designed for employees of specific non-profit organizations (NPOs), including public schools, hospitals, and religious institutions. The key features of a 403b plan include:
Employee contributions: Employees can contribute a portion of their salary to the 403b plan on a pre-tax (tax-advantaged) basis. This means their contribution is deducted from their pay before income taxes are calculated.
Tax-deferred growth: In a 403b account, an employee's contributions and earnings on those contributions grow tax-deferred. Typically, the individual is taxed when withdrawing the money, which usually happens in retirement.
Employer contributions: Depending on the NPO, some employers may offer to match a portion of the employee's contributions.
Investment options: Those who participate in a 403b plan have a range of investment options from which to choose.
Withdrawal rules: In most cases, 403b policyholders may withdraw from the plan without incurring a penalty, provided they are older than 59 years and six months.
Loans and hardship withdrawals: Under certain circumstances, participants may be allowed to take out loans against their 403b account balance or make hardship withdrawals.
Non-governmental 403b plans: 403b plans are most commonly associated with non-profit organizations.
Let's look at the following example of a 403b plan to understand how it works.
Anne works at a non-profit hospital, and her employer sponsors a 403b plan. She decided to contribute a percentage of her salary to the plan to save more for retirement. Over the years, the contributions will accumulate in the 403b account, earning interest.
When Anne reaches retirement age, she can start withdrawing funds to support her retirement lifestyle. The advantage of this plan is the growth of her contributions occurs on a tax-deferred basis, meaning she will only pay tax on withdrawn amounts.
What is a 457b plan?
A 457b is a deferred compensation plan available to state and local government employees and specific non-profit organizations. Here's more information about 457b plans:
Employee contributions: Employees can contribute a portion of their salary to a 457b plan on a pre-tax basis.
Tax-deferred growth: As with a 403b, the contributions and any earnings on those contributions in the 457b account grow tax-deferred.
Withdrawal rules: A unique feature of 457b plans is that employees can withdraw funds without penalty when they separate from service, regardless of age.
Governmental and non-governmental 457b plans: State and local governments offer governmental plans, while tax-exempt organizations typically offer non-governmental plans.
Catch-up contributions: Participants can contribute more than the standard annual limit within three years of the plan's specified retirement age.
Consider the following example to understand this plan better:
Bill works for the city government and contributes a portion of his salary to the 457b plan. Over the years, his contributions will grow through investments. When Bill retires, he can withdraw funds. The growth on his contributions isn't taxed, but he pays taxes only when he withdraws money from the plan.
What are the differences between 403b and 457b plans?
Although they’re similar, there are some differences between a 403b and 457b plan:
403b vs 457b plans: employer contributions
Employer contributions differ between 403b and 457b plans. Here's how:
| 403b | 457b | |
|---|---|---|
| Matching contributions | Many plans allow employers to match contributions relative to the employee's contributions. And it is similar to 401k plans in the private sector. | Employers matching contributions are rare. |
| Non-elective contributions | Employers can make non-elective contributions to eligible employees' accounts. | Non-elective contributions are less common in 457b plans. |
| Maximum contribution limits | The total contribution limit (i.e., employee + employer contributions) is generally higher than 457b plans. | Employees may defer a significant portion of their salary to this plan. Still, the overall contribution limit is often lower than 403b plans. |
| Special catch-up contributions | From age 50, employees can make catch-up contributions to the plan, exceeding the standard annual limit. | Some 457b plans allow catch-up contributions, but the rules vary according to the plan. |
| Timing of employer contributions | Employer contributions are typically made concurrently with each paycheck. | Employer contributions are less predictable as they are made at the employer's discretion. |
403b vs 457b plans: investment options
Below is an overview of the different investment options for 403b and 457b plans:
| 403b | 457b | |
|---|---|---|
| Investment choice options | These could be mutual funds, annuities, and sometimes employer stock. | Investment choices include mutual funds, fixed or variable annuities, and more. |
| Governmental vs. non-governmental | The investment choices differ between governmental and non-governmental plans. | Investment regulations vary based on governmental and non-governmental plans. |
| Control over investment choices | Some 403b plans offer participants a self-brokerage option, providing more flexibility. | Some plans offer a brokerage window or self-directed options. |
| Unique features | Plans backed by educational institutions may allow Roth contributions. | Separation from service allows penalty-free withdrawals under certain conditions. |
403b vs 457b plans: catch-up contributions
The catch-up contribution options differ between these two plans in the following ways:
| 403b | 457b | |
|---|---|---|
| Eligibility age | Participants can make catch-up contributions from age 50. | Participants may make catch-up contributions in the three years before retirement. |
| Catch-up contribution limits | The catch-up contribution limit for 403b in 2023 is $7,500. | The elective deferral limit for 457b in 2023 is $22,500 |
| Special catch-up provisions | Fifteen Years of Service Catch-Up provision | There are no set special provisions. |
| Interaction with standard contribution limits | Catch-up contributions are separate from the standard annual contribution limit. | Same as 403b. |
403b vs 457b plans: withdrawals
The table below exhibits the differences in withdrawal options for 457b vs. 403b plans:
| 403b | 457b | |
|---|---|---|
| Penalty-free withdrawals | Participants may incur a penalty fee if withdrawing before the specified age. | Some plans allow penalty-free withdrawals before the specified age under specific conditions. |
| Separation from service withdrawals | Participants can typically withdraw without penalties after separating from service. | Such withdrawals may incur a penalty if on a non-governmental plan. |
| Loans | Some plans allow participants to take out a loan against their account balance under specific conditions. | Like 403b, the rules and options may vary according to the plan. |
| Roth contributions and qualified distributions | If a plan allows Roth contributions, some qualifying distributions can be tax-free under certain conditions. | Similar to 403b. |
Can I access my 403(b) or 457(b) plan online to manage my investments?
In most cases, participants from 403b and 457b plans can access and manage their accounts online. Some of the features of this include the following:
Investment management
Statements and document access
Educational resource
Allowing for changes like beneficiary designations and personal information
What happens to my 403(b) or 457(b) plan if I change jobs or employers?
Participants leaving their job or employer have several options for handling their 403b or 457b plan. Here are the typical choices:
Leave your existing plan as-is
Transfer funds into a traditional investment retirement account (IRA) or Roth IRA
Roll it over into a new plan
Cash-out
Can I roll over funds from a 403(b) plan into a 457(b) plan or vice versa?
Under certain conditions, it is possible to directly roll over funds from a 403b to a 457b plan and vice versa. However, the rules vary according to the employer and plan administrators. The IRS has specific rules governing rollovers between different plan types, so participants must research the laws and associated costs before doing so.
Are there any recent developments or changes in 403(b) and 457(b) plan regulations?
The Secure 2.0 Act of 2022 includes changes for participants making catch-up contributions to their plan. The effective date for this Act was initially meant to be January 1, 2024, but has been delayed to January 1, 2026.
Need more information?
When doing a 403b vs 457b comparison, you’ll see these plans differ in a few respects. The main differences lie in the employer contributions, catch-up contributions, investment options, and withdrawal conditions.
The right financial advisor will ensure that you select the retirement savings option that best suits your situation and future plans. If you need help deciding between 403b and 457b, Unbiased can match you with an SEC-regulated financial advisor.
Senior Content Writer
Rachel is a Senior Content Writer at Unbiased. She has nearly a decade of experience writing and producing content across a range of different sectors.