Should I enroll in a 403(b) or a 457 plan?
I'm 27 years old and starting working in the public sector this year. I have student loan debt and earn under $30K a year. I have the option of enrolling into a 403(b) and/or 457 plan at work. I can also enroll in both. Which plan should I go for?
Congratulations on beginning to save for your retirement. Most 27 year olds wait. Both plans allow you to defer your pay up to the annual limit of $18,000. Check to see if both offer the Roth option. At your age, I recommend you take advantage of a Roth plan.
The tax withdrawal is different. Under a 403(b) plan, the earliest you can withdraw without an early 10% penalty is age 55. The 457 plan allows the withdrawal without incurring a 10% early withdrawal penalty, whatever your age. With that said, the 403(b) plan generally allows loans and 457 plans do not. So you need to ask yourself if you will be staying in public service your whole career. If you plan on doing something different in the future, then the 457 plan is better. Good luck and invest for growth.
I am going to give you a few budget guidelines first.
1.) Pay off your student loan debt in 10 years or less by using 30% of your gross income per year to pay down the debt.
2.) Save 10% of your gross income in a 403(b) or 457.
Both the 403(b) and the 457 are very similar, but there are a couple of key differences, and they can vary from employer to employer. Here is a guide that is a solid starting point.
However, the primary answer to your question is to choose the account type that has the best investment options. (Which depends from employer to employer. Here in Florida, the 457 is typically best since you have access to a full range of investment options. But this is not true in every state.) Thus, it's impossible to give you a soundbite answer that is definitive without knowing your specific situation. Also, creating an optimal investment strategy from the choices you have is not simple enough to provide you with an answer in just a few sentences. With that being said, as a general guide, contact your employer and ask for a list of the available companies that offer the 403(b) and the 457 through your employer. Once you have that, you will want to get the list of investment options from each provider. Then, you can evaluate which one is best. (typically, the best one is going to be the one that offers you the most investment choices to pick from, but this is not always the case.) Once you have made that decision, open the account, implement your investment strategy, and then save 10% a year of your gross income into the account.