457 Plans and 403(b) Plans: A Comparison

For workers in the public sector, pensions are usually the focus when it comes to retirement. Defined-benefit plans can be a great way to plan for retirement. But many folks also have the option to contribute to a different kind of plan. These workers may not be able to contribute to a 401k (plan) through their employer, but they should still examine their retirement savings options. A pension is no guarantee of a comfortable retirement.

Both the 457 and 403(b) plan are voluntary programs. Employees are not required to participate and many choose not to, since they’re also eligible for defined benefit contribution plans.

Here is an outline of both major plans available to public employees. (For more, see: Best Strategies for Managing Taxes on Distributions.)    

The 457 Option

A 457(b) is a plan that is typically offered to state and local government workers. One of the biggest benefits with a 457(b) plan is the extra catch-up policy. If you’re within three years of normal retirement age (according to your plan), you may contribute up to $36,000. This is a greater catch-up provision than even 401(k)s provide. You can also put in an extra $6,000 if you’re at least 50 years old.

If you’re still working at a job where you have a 457(b), you can’t take any deductions until you’re at least 70.5 years old. This might be detrimental if you’re hoping to retire before then and will need money immediately. However, if you are no longer working there, you can take the distributions at any time no matter your age.

“You can take your money before you are 59.5 years with a 457 without any penalties, unlike any other retirement plan out there,” said Assistant Professor of Finance and Financial Planning, Inga Chira, of California State University, Northridge. “That’s a big deal, especially if I’m planning to leave my job in the future.” (For related reading, see: Can I Roll my 403(b) and 457 into Other Low-Cost Vendors When I Change Jobs?)

The 403(b) Lowdown

A 403(b) plan is typically offered to nonprofit employees and government workers. Contributions to a 403(b), like a 401(k), are tax deductible. You can contribute up to $18,000 in 2015 and an extra $6,000 if you’re 50 years or older. You have more options of investments and firms to choose from in a 403(b) than a 457(b).

“Although a 457 can also have multiple providers, usually, the choice of providers is not as wide as a 403 (b),” Chira said.

A 403(b) also acts like a 401(k) in that you can start taking distributions at age 59.5, no matter if you’re still working at that organization or not.

How to Choose

If you need more time to put aside money for retirement, a 457(b) plan is best for you. It has the better catch-up policy of the two and will allow you to stash away more money for retirement. However, if you want a larger amount of investment options to choose from, a 403(b) is likely to be your best bet.

There’s a potential third option as well: If you’re eligible for both plans, you can contribute to both. That means you can put away $36,000 a year, not including any catch-up contributions if you’re eligible.

“This is especially appealing to employees who have great income and are trying to minimize their taxes,” Chira said.

The Bottom Line

Don’t completely rely on that pension to provide for your retirement. Take your financial future into your own hands with a 457 or 403(b). If you have more questions about the plans available to you, contact your agency’s human resources department or your plan’s provider. They’ll be able to shed more light on your particular situation. (For related reading, see: 403(b) Plan: Tutorial.)