Understanding 457(b) vs. 403(b) Retirement Plans

One of the best things you can do for your future self is to start saving for retirement as early as possible. Many employers offer tax-advantaged retirement plans, including public service and government organizations. These plans encourage workers to save and help them take advantage of potential employer matches and tax-deferred growth over time. They also allow workers to take advantage of their employer deducting contributions directly from their paycheck BEFORE taxes are paid. This allows workers to "pay themselves first", reduce potential taxes on their income and ease the burden of sending in contributions on their own.

If you work in public service, you might be offered a 457(b) or a 403(b). Here's what you need to know about these retirement plans.

A 457(b) is generally offered to state/local government workers and public service employees such as police officers, firefighters, non-profit hospital workers and university workers. A 457(b) is often thought of as a supplemental savings plan as many workers covered under a 457(b) plan are also covered under a defined benefit pension plan or another retirement plan (ie, 403(b) plan). 

Many of these 457(b) plans let you make pre-tax contributions, allowing you to defer income taxes now, and helping to lower your current income tax bill. Later, when you withdraw from the plan, you pay taxes on the amount of the withdrawal at your marginal tax rate. Getting a tax break now may be an advantage, especially if you end up in a lower tax bracket during retirement. Some 457(b) plans sponsored by governmental employers permit you to designate your 457(b) contributions as Roth.

One of the interesting features of a 457(b) retirement plan is that you don't end up with an early withdrawal penalty if you leave your job and need to take a distribution. This is different from many other tax-deferred retirement plans like 401(k) plans, which has an early withdrawal penalty of 10% if taken before age 59½, except in certain circumstances¹. If you're part of a nongovernmental 457(b) plan (ie, sponsored by a tax-exempt employer), you are generally taxed on your deferred compensation when it is paid or made available to you. However, you may be allowed to make an election to delay your distribution which will impact when the amount is considered taxable to you.

A 403(b) plan is usually offered to workers in nongovernment jobs, such as teachers at public or private schools, employees of 501(c)(3) organizations, employees of non-profit hospitals, and ministers who work for religious organizations.

Like a 457(b) plan, contributions are generally made with pre-tax dollars and you pay ordinary incomes taxes on the amount when you withdraw from the plan. However, some 403(b) plans permit you to make your 403(b) contributions to a designated Roth account in which case, your distribution may be tax-free (add qualified Roth distribution footnote). Unlike a 457(b), the 403(b) plan is subject to a 10% early withdrawal penalty if you take distributions before you reach age 59½.

Both of these plans have the same basic contribution limits. In 2024, the contribution limit is $23,000 and for 2025, the contribution limit is $23,500. However, 403(b) plans and governmental 457(b) plans allow for a catch-up contribution of up to $7,500 per year (for 2024 and 2025) for those who are age 50 and older². Additionally, both 403(b) and governmental 457(b) plans offer super catch-up contributions (for qualifying individuals ages 60 to 63) starting in January 2025. These individuals between age 60 and 63 can make catch-up contributions of up to $11,250, rather than the regular $7,500 limit.²

One great feature of participating in a 457(b) plan is that 457 contributions do not offset or reduce the contributions which can be made to another employer sponsored retirement plan. As such, employees can contribute up to $23,500 to a 457(b) plan and an additional $23,500 to a 403(b) or 401(k) plan (if available). 

Note that 457(b) and 403(b) plans have special provisions for making additional contributions on top of the basic contributions.

• 457(b): An additional contribution up to $23,000 in 2024 or $23,500 in 2025 can be made if you're within three years of your normal retirement age, if allowed by the plan.
• 403(b): A "15-year of service catch-up" allows up to an extra contribution of $3,000 per year with a lifetime maximum limit of $15,000. However, very few, if any, plans offer this option due to the complexity of the rules.

These contribution rules can be attractive to those who work in nonprofit and government organizations. Check with your employer to see if they offer matching contributions. If so, a percentage of your contributions can be matched by the employer and added to your retirement account. This is "free money" that can help accelerate your saving and investing towards retirement.

It's important to understand that you're only eligible for these plans if you have a specific type of employer that offers them. You may not get the option to choose between them, and there aren't "solo" versions of these plans like you might see with a 401(k).

Distributions from 403(b) plans and governmental 457(b) plans can be rolled into individual retirement accounts (IRAs) if you leave your employer and want to preserve your tax deferred status. Distributions from non-governmental 457(b) plans are not eligible for rollover and are generally reported to you as additional W-2 wages. 

If you're looking to save beyond a 403(b) and/or 457(b), you might consider opening an IRA. These accounts are available to anyone with earned income and their spouses. However, it's important to note that your annual contributions to an IRA are much lower, limited to $7,000 for 2024 and 2025 ($8,000 if older than 50) and may be tax deductible. Other options to save for retirement may include a health savings account (HSA) if you have an eligible High Deductible Health Plan (HDHP) or a brokerage account.

In the end, it's important to consider all your choices to save for retirement. Talk to your employer about your retirement benefits and consider discussing your retirement goals with a financial advisor. Whatever you do, save now, so that your future self will thank you for it later.

Schwab does not provide tax advice. We suggest you consult with a tax professional with regards to your personal circumstances.