403(b) Plan

A 403(b) plan is a type of tax-advantaged retirement savings strategy often made available to individuals employed by non-governmental organisations and public sector employees. Some employees are forced to participate in the plan, while others have the choice to do so. In addition, 403(b) plans are quite similar to 401(k) plans because they both allow for pretax contributions and require you to pay taxes on any withdrawals once you reach retirement age. The employer and the employee can contribute to a 403(b) plan if the company offers the plan.

You will be penalised, just like with a 401(k), if you take money from your 403(b) account before you become 59 years old.

457(b) Plan

The 457(b) plan is a tax-advantaged contribution arrangement for public employees, enabling you to defer some of your income into retirement savings. You are eligible for this plan if you work for the government. These plans are required to be financed with pretax money by federal rules. Once you reach retirement age and begin withdrawing money from the plan, the money is subject to the same taxation as ordinary income. Both the 457(b) & the 403(b) are comparable in this respect, but if you opt to take money out of the 457(b) when you leave your work, you won't be subject to an early withdrawal penalty. This is not the case with the 403(b). The primary distinction between a 403(b) plan and a 457(b) plan is that the former does not impose a penalty for making early withdrawals.

A comparison of the 403(b) and 457(b)

The 457(b) and the 403(b) will provide you with tax benefits in retirement. The main distinctions are as follows:

Contributions made by employers. In the United States, employers can put money into their workers' 401(k)s and 457(b)s. However, unlike 401(k) plans, employer contributions are uncommon. The 457(b) doesn't have an employer contribution cap, but the 403(b) cap is substantially larger. In 2023, the maximum contribution to a 457(b) plan will be $22,500, while the maximum contribution to a 403(b) plan will be $66,000.

Extra Payments to Catch Up. Catch-up donations are welcome in both schemes. If you've been with your company for at least 15 years, you could be eligible to make an extra $15,000 in 403(b) contributions over five years. Meanwhile, if you haven't already contributed the maximum to your 457(b) account, you can double your yearly contribution limits in the three years before you reach federal retirement age.

Withdrawals. The age of 59 and 12 is the cutoff for making penalty-free withdrawals from a 403(b) or 457(b) plan. However, if you quit the company funding your 457(b), you can begin taking withdrawals without incurring penalties.

Choices for Financial Investments. Compared to 401(k)s, these plans typically have fewer investment alternatives. Mutual funds and annuities are the two most common types of investments. You should be able to build a basic 3-fund portfolio. Still, if your plan's investment selections are limited or fees too expensive, consider opening an IRA and contributing the maximum allowed to your workplace retirement plan.

How Do You Know Which Plan Is Best?

Since most companies only provide a single retirement plan, most employees can choose between 403(b) and 457(b). If your workplace offers a matching contribution programme, you should maximise that programme as soon as possible if you have the chance to do so. If your company only offers a matching contribution to one of your accounts, putting all your money into that one makes sense.

Think about your future in the workforce once you've played out the match. The 403(b) 15-year catch-up contribution rule could enable you to contribute extra pretax money if you anticipate remaining with the same employer for 15 years or longer. However, a 457 plan's matching contributions can help you save even more for retirement if you expect to stay with your current job for at least another three years after retirement age.

Are 403(b) and 457(b) Plans Mutually Exclusive?

If your company provides both options, you can put money into a 403(b) and a 457 plan. Contributing to 403(b) and 457 plans will increase your potential tax savings. You may put as much money as you like into both accounts because the contribution limitations for the two plans are independent.

Conclusion

Employer-sponsored retirement accounts may be useful for saving for retirement and gaining investment independence. Pretax contributions can be made to 403(b) & 457 plans. Talk to your company's human resources department if you have questions about benefits you may be eligible for.