If you're looking for a way to save for retirement, you may be considering a 403b or 457b. Both of these options offer tax advantages and can help you save money for the future. However, there are some important differences between these two types of plans that you should know about before making a decision.
In this article, we will compare 403bs and 457bs and look at the pros and cons of each option. By the end of this article, you will be able to make an informed decision about which plan is right for you!
403b Vs 457b Table of Contents
What is a 403b?
A 403b is a retirement savings plan offered by many public schools and non-profit organizations. It allows employees to save money for retirement on a tax-deferred basis.
What is a 457b?
A 457b is a retirement savings plan that is offered by many state and local government employers, as well as some non-profit organizations.
It works similarly to a 401k, in that employees can elect to have a portion of their paycheck withheld and deposited into the account. The money in the account can then be invested in a variety of different ways, and the funds can grow tax-deferred until they are withdrawn at retirement.
What is The Difference Between a 403b and a 457b?
The first key difference between 403b and 457b is the contribution limit. With a 403b, you can contribute up to $18,000 per year, whereas with a 457b you can contribute up to $24,000 per year. This higher contribution limit with a457b can be beneficial if you're looking to save more for retirement.
Another key difference between the two types of retirement plans is the investment options. With a 403b, you're limited to investing in annuities and mutual funds, whereas with a 457b you can also invest in stocks and bonds. This can be beneficial if you're looking for more investment options.
Finally, another key difference between 403b and 457b is the withdrawal rules. With a 403b, you're required to start taking withdrawals at age 70 ½, whereas with a 457b you can choose to start taking withdrawals at any age. This can be beneficial if you want more flexibility with when you start taking withdrawals from your retirement account.
What Are The Different Types of 403b?
There are two different types of 403b plans: the traditional 403b and the Roth 403b.
The traditional 403b is funded with pre-tax dollars, which means that you will not have to pay taxes on the money until you withdraw it in retirement.
The Roth 403b is funded with after-tax dollars, which means that you will have to pay taxes on the money when you contribute it, but you will not have to pay taxes on it when you withdraw it in retirement.
What Are The Different Types of 457b?
There are two types of 457b plans: deferred compensation and non-qualified.
Deferred compensation is the more common type, and it allows employees to set aside a portion of their salary each year, before taxes are taken out.
Non-qualified plans are less common, and they're typically used by executives or other high-paid employees. With a non-qualified plan, employees can contribute up to 100% of their salary each year.
What Are The Advantages of a 403b?
There are a few key advantages that a 403b has over a 457b. For starters, 403b allows employees to contribute pretax dollars to their accounts. This can lead to significant tax savings, especially for those in high tax brackets.
Additionally, many employers offer matching contributions on 403b accounts up to a certain percentage of an employee's salary. This can be a great way to boost your savings.
What Are The Advantages of a 457b?
Now that we've looked at the 403b, let's take a look at its close cousin, the 457b. A 457b is very similar to a 403b, but there are a few key differences that you should be aware of before making your decision.
The biggest advantage of a 457b is that it allows you to contribute more money on a yearly basis. In 2019, the contribution limit for a 457b is $19,000, compared to just $16,500 for a 403b. This can be a huge advantage if you're looking to save as much money as possible for retirement.
Another advantage of the 457b is that it doesn't have the same early withdrawal penalties as a 403b. With a 403b, you'll be subject to a ten percent penalty if you withdraw money before the age of 59 and a half.
However, with a 457b, you can withdraw money without any penalties as long as you're over the age of 55. This can be a huge advantage if you need to access your money early for any reason.
The final advantage of a 457b is that it's not subject to the same income limits as a 403b. This means that anyone, regardless of their income, can contribute to a 457b. This can be a huge advantage if you're looking to save as much money as possible for retirement.
What Are The Disadvantages of 403b?
There are some potential disadvantages to consider when it comes to 403b plans. One is that there can be high fees associated with these types of retirement accounts.
Another potential downside is that you may not be able to access your funds as early as you would with other types of retirement accounts. Additionally, if you leave your job before retirement age, you may not be able to keep your 403b plan.
What Are The Disadvantages of 457b?
The disadvantages of 457b are that it is not as tax-deferred as 403b, and there are more restrictions on how the money can be used. For example, if you leave your job before you retire, you may have to pay back some of the money that you have withdrawn from your 457b.
Another disadvantage of 457b is that there are fewer investment options than there are with 403b. This can make it more difficult to find an investment that meets your needs and goals.
Finally, 457b plans often have high fees associated with them. These fees can eat into your investment returns, making it more difficult to reach your financial goals.
So, Which One Should You Use?
It depends on your specific situation. If you are currently employed and plan on staying with your current employer for a while, then a 403b may be the better option. On the other hand, if you are self-employed or plan on changing jobs in the near future, then a 457b could be a better fit.
Both options have their pros and cons, so it's important to do your own research and figure out which one is right for you.
What Are Some Alternatives to Using a 403b or a 457b?
There are a few alternatives to using a 403b or 457b.
One is to use a Roth IRA, which has some similarities to a 403b in that it allows you to save for retirement on a tax-deferred basis. However, there are some key differences between the two accounts.
With a Roth IRA, you pay taxes on the money you contribute upfront, but you can withdraw the money tax-free in retirement. This makes a Roth IRA a good choice if you think your tax rate will be higher in retirement than it is now.
Another alternative to a 403b or 457b is to invest in a taxable brokerage account. This account doesn't offer any tax breaks on the money you contribute, but it does offer more flexibility in how you can invest the money. For example, you can invest in stocks, bonds, and mutual funds without restrictions.
What Are Some Tips For Using a 403b?
There are a few things to keep in mind when using a 403b. One is that you will want to make sure that you are contributing the maximum amount possible each year. This is because the sooner you start saving, the more time your money has to grow.
Another thing to keep in mind is that you will want to diversify your investments. This means that you should not put all of your money into one stock or mutual fund.
Instead, you should spread your money out among a few different investments. This will help to reduce your risk and increase your chances of seeing a return on your investment.
What Are Some Tips For Using a 457b?
There are a few things to keep in mind when using a 457b. First, remember that this is an investment account, so you'll want to think about how much risk you're willing to take on. If you're younger, you may be able to afford more volatile investments, but as you get closer to retirement, you'll want to be more conservative.
Second, keep in mind that you may have to pay taxes on your withdrawals, so it's important to plan accordingly. With a 403b, you can withdraw money without paying any taxes, but with a 457b, you'll be taxed at your marginal tax rate.
Finally, remember that you're in control of your 457b. You can change your investments, contributions, and beneficiary at any time. So, if you need to make a change, don't hesitate to do so.