Difference Between 457 and 403b

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 plansDefined Contribution PlansA defined contribution pension plan is when the employer and the employee frequently make a significant amount of contributions to enable employees to save a decent amount of money for the retirement period and leave with the utmost dignity in their retirement phase.read more. 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 AnnuitiesTax-Sheltered AnnuitiesTax-Sheltered Annuity (TSA) is a form of retirement savings plan in which the contributions made are from the untaxed income. Therefore the contributions and interest accrued on the same are not taxed during savings, while only the withdrawals are taxed.read more (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 taxExcise TaxExcise tax is the tax applied to the sale of particular goods and services like tobacco, fuel, and alcohol. It is not directly paid by an individual consumer, instead, the tax department levies the tax on producer or merchant of products.read more 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 fundsMutual FundsA mutual fund is a professionally managed investment product in which a pool of money from a group of investors is invested across assets such as equities, bonds, etcread more, 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

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 appetiteRisk AppetiteRisk appetite refers to the amount, rate, or percentage of risk that an individual or organization (as determined by the Board of Directors or management) is willing to accept in exchange for its plan, objectives, and innovation.read more 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.

This article has been a guide to 457 vs. 403 b. Here, we discuss the top 4 differences between the 457 and 403b plans, infographics, and a comparative table. You may also have a look at the following articles: –

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