When it comes to personal finance, there are a lot of options to choose from. Two of the most popular choices are the 401k and 457 plans. Both have their own unique advantages and disadvantages, so it can be difficult to decide which one is right for you.
In this article, we will compare and contrast the two plans, in order to help you make an informed decision about your financial future!
401k Vs 457 Table of Contents
What is a 401k?
A 401k is a retirement savings plan sponsored by an employer. It lets workers save and invest for their retirement on a tax-deferred basis. Employees can contribute to their 401k through payroll deductions, and employers may match employee contributions up to a certain percentage.
What is a 457?
A 457 is a retirement savings plan sponsored by a state or local government entity, such as a school district, city, or county. Like a 401k, employees can contribute to their 457 through payroll deductions and the funds grow on a tax-deferred basis.
What is The Difference Between a 401k and a 457?
The biggest difference between a 401k and a 457 is the contribution limits. For 2022, the contribution limit for a 401k is $19,000, while the contribution limit for a 457 is $18,500.
Another big difference is that 401k contributions are made with pretax dollars, while 457 contributions are made with after-tax dollars.
This means that 401k contributions reduce your taxable income, while 457 contributions do not.
What Are The Different Types of 401k?
There are two different types of 401k: traditional and Roth.
With a traditional 401k, your contributions are made with pretax dollars, which reduces your current taxable income. Your money then grows tax-deferred until you withdraw it in retirement, at which point it is taxed as ordinary income.
With a Roth 401k, your contributions are made with after-tax dollars, so you don't get a tax break upfront. However, your money grows tax-free and can be withdrawn tax-free in retirement.
What Are The Different Types of 457?
There are two different types of 457 plans: the regular 457 and the Roth 457.
The regular 457 is funded with pretax dollars, meaning that your contributions lower your taxable income for the year.
The Roth 457 is funded with after-tax dollars, so you don’t get the upfront tax break, but your withdrawals in retirement are tax-free.
What Are The Advantages of a 401k?
There are a few advantages of having a 401k that you should know about. One is that your employer may offer to match a percentage of your contribution, meaning you can get free money just by saving for retirement!
Another advantage is that 401ks often have lower fees than other types of investment accounts, so you can keep more of your money.
What Are The Advantages of a 457?
The 457 is a defined contribution retirement plan, which means the employee and employer can contribute to the account. The money in the account grows tax-deferred and there are no income taxes due on withdrawals after age 59 ½.
One of the biggest advantages of a 457 is that the employee can choose to have their contributions come out of their paycheck on a pretax basis. This reduces the employee’s taxable income, which can result in significant tax savings.
Another advantage of a 457 is that the account balance is not subject to Social Security and Medicare taxes. This can be beneficial for employees who are in a higher tax bracket and would otherwise pay a higher rate on their Social Security and Medicare taxes.
What Are The Disadvantages of 401k?
There are a few disadvantages of 401k that you should know about before making your decision.
The first disadvantage is that you may not be able to access your money as early as you would with a 457. With a 401k, you typically have to wait until you’re 59 and a half to start taking withdrawals without paying a penalty.
Another disadvantage of 401k is that you may have to pay taxes on your withdrawals when you retire. With a 457, you can typically withdraw your money tax-free.
Finally, 401ks often have higher fees than 457s. This means that you could end up paying more in fees over the life of your retirement account.
What Are The Disadvantages of 457?
The first disadvantage of 457 is that it's not as well known or understood as 401k. This can make it harder to find information and get advice when needed.
Another potential downside of 457 is that there may be fewer investment options available. This can limit your ability to diversify your portfolio and potentially reduce returns.
Lastly, 457 plans may have higher fees than 401k plans. This can eat into your investment returns and reduce the overall growth of your nest egg.
So, Which One Should You Use?
The answer to this question is going to be different for everyone. It really depends on your specific financial situation and what you are looking to achieve.
If you are trying to save for retirement, then a 401k might be the better option. However, if you are trying to save for a specific goal, such as a down payment on a house, then a 457 might be the better option.
There are Pros and Cons to each retirement savings account, so it’s important that you understand both before making a decision. It’s also important to speak with a financial advisor to get professional advice that is tailored to your unique situation.
What Are Some Alternatives to Using a 401k or a 457?
There are a few alternatives to using a 401k or 457.
One is to use an IRA, which is an individual retirement account. Another option is to use a Roth IRA. A third possibility is to invest in a life insurance policy. Finally, you could also save money in a regular savings account.
Each of these options has its own set of advantages and disadvantages. You will need to decide which option is best for you based on your own personal circumstances.
What Are Some Tips For Using a 401k?
There are a few things to keep in mind when using a 401k. First, make sure that you are contributing enough to get the employer match. This is free money that your company is offering, and it’s worth taking advantage of.
Second, invest in a diverse mix of stocks and funds to minimize your risk. And finally, don’t forget to rebalance your portfolio periodically to keep your investments on track.
What Are Some Tips For Using a 457?
There are a few things to keep in mind when using a 457. Make sure you're comfortable with the investment before putting any money in. Understand the fees associated with the account and the risks involved.
Consider how long you plan on working for the company. If you think you'll be there for a while, you may want to consider contributing more to the 457.
Keep in mind that you're not able to access the money until retirement. If you need the money sooner, a 401k may be a better option.