Know the Difference Between 403b and 457 Retirement Plans

403b vs 457

When you decide to start saving for your retirement, it is important to know that there are plans other then the popular 401k that you can take a look at. These include the 403 and the 457. In a 401k plan, the employer initiates the plan and withholds the money from your paycheck to contribute to the fund. The employer may or may not match this amount so that you get double the investment. 403b retirement plans are designed for those who work in the non-profit sector of the economy and 457 plans are those for those who are employees of the government. In order to get the best possible tax benefits and to get a better return on your investment when you retire, you should know how these plans are similar and how they are different.

About the 403b

Who qualifies for a 403b? Anyone who works for non-profit businesses can take advantage of a 403b retirement plan. This includes teachers, nurses, pastors, librarians – if you work in a school, hospital, cooperative or other non-profit industry then you can invest in this plan. The way it works is very similar to a 401k in that you decide what percentage of your salary you want to contribute and the employer withholds this amount and pays it into the plan. This is before taxes so you don’t pay any taxes on this portion of your earnings.

When you retire and start taking monthly payments from the plan, it is then that you start paying taxes on this money. This is why you may have heard the term Tax Sheltered Annuity being applied to a 403b plan. An employer in the non-profit sector can offer this plan to all employees because it is exempt from the Employer Retirement Income Security Act.

About the 457

Those who are employed by the government can take advantage of a 457 retirement plan. The contributions are tax free and are deducted from your salary by your employer. The main difference is that you can withdraw funds from this plan before you reach age 59.5 and not have to pay a penalty. However, when you do withdraw any money, it then becomes taxable.

Summary

  1. Both the 403b and the 457 are tax deferred retirement plans.
  2. The minimum retirement age for 403b is 59.5 years, but there is no minimum retirement age with a 457 plan.
  3. An employee can contribute to both plans.
  4. You cannot have a Roth IRA account and a 457 plan, but you can roll over a 457 to a Roth IRA.
  5. Employers can make contributions to a 403b, but not to a 457.
  6. There are different amounts that you can contribute annually to both plans

 

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