What is the difference between 457b and 403b? Both are types of retirement plans offered by employers in the United States, but they have distinct features and regulations that make them suitable for different types of employees and employers. Understanding these differences is crucial for individuals to make informed decisions about their retirement savings options.
Firstly, the 403b plan is designed for employees of certain tax-exempt organizations, such as public schools, colleges, universities, hospitals, and certain non-profit organizations. On the other hand, the 457b plan is available to employees of state and local governments, as well as certain tax-exempt organizations. This means that if you work for a private company, you may not have access to a 403b plan, but you might be eligible for a 457b plan.
Another key difference lies in the contribution limits. For the 403b plan, the annual contribution limit is $19,500 in 2021, with an additional catch-up contribution of $6,500 for those aged 50 or older. In contrast, the 457b plan has a higher annual contribution limit of $19,500 for 2021, and the catch-up contribution is also $6,500 for those aged 50 or older. This means that if you have the option to contribute to both plans, you can potentially save more for retirement with a 457b plan.
One significant difference between the two plans is the tax treatment. Contributions to a 403b plan are made with pre-tax dollars, which means they are not subject to income tax until they are withdrawn. Similarly, contributions to a 457b plan are also made with pre-tax dollars. However, the withdrawal rules for both plans differ. Withdrawals from a 403b plan are generally taxed as ordinary income, while withdrawals from a 457b plan are taxed as ordinary income unless they are made after age 59½ or due to certain other qualifying events.
Additionally, the 403b plan allows for a wider range of investment options compared to the 457b plan. This is because 403b plans are subject to the Employee Retirement Income Security Act (ERISA), which provides more stringent regulations and investment options for plan participants. In contrast, 457b plans are not subject to ERISA, which can limit the investment options available to participants.
In conclusion, the main differences between 457b and 403b plans lie in their eligibility, contribution limits, tax treatment, and investment options. Understanding these differences can help individuals make the most of their retirement savings opportunities. It is important to consult with a financial advisor or tax professional to determine which plan is best suited to your individual needs and circumstances.
