Making the decision between a 457 and 401k can be difficult. Both options offer tax advantages and employer contributions, but there are some key differences that you need to consider before making a choice.
In this guide, we will compare and contrast 457 Vs 401k, looking at the pros and cons of each option. By the end of this article, you will have all the information you need to make an informed decision about which retirement plan is right for you!
457 Vs 401k Table of Contents
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 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 The Difference Between a 457 and a 401k?
The two most common retirement savings plans are the 457 and the 401k. They both have their own set of rules and regulations, and each has its own advantages and disadvantages. So, which one is right for you?
The biggest difference between a 457 and a 401k is that a 457 is funded by your employer, while a 401k is funded by you. With a 457, your employer can choose to match your contributions up to a certain amount, but they are not required to do so. With a 401k, you must contribute your own money, and your employer may or may not offer a matching contribution.
Another difference between the two plans is that a 457 can be used for a wide variety of investments, while a 401k is limited to investment options that are approved by the IRS. This means that you have more control over how your money is invested with a 457, but it also means that there is more risk involved.
Finally, the amount of money that you can contribute to a 457 is higher than the amount you can contribute to a 401k. For 2022, the contribution limit for a 457 is $18,500, while the contribution limit for a 401k is $24,500.
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 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 Advantages of a 457?
There are a few key advantages of a 457 over a 401k. Firstly,457 contributions are not subject to income tax, meaning you can save more money each year.
Secondly, the funds in a 457 can be accessed earlier than a 401k (usually at age 55 rather than 59 ½). Finally, if you leave your job before retirement, you can often roll your 457 over into a new employer’s retirement plan.
What Are The Advantages of a 401k?
There are a few key advantages that a 401k offers over a 457 plan. Firstly, your employer is likely to offer some sort of matching contribution if you sign up for a 401k – meaning they’ll effectively give you free money towards your retirement savings.
Secondly, the money you contribute to a 401k is deducted from your paycheck before taxes are taken out – so you’ll end up paying less in taxes overall.
Finally, 401k plans tend to have lower fees than 457 plans, meaning more of your money will stay invested and grow over time.
What Are The Disadvantages of 457?
There are a few disadvantages to consider when it comes to 457s.
One is that they tend to be less portable than 401ks. This means that if you change jobs, you may not be able to take your 457 with you. Additionally, there may be restrictions on how and when you can access your funds. For example, some plans may require you to wait until you reach a certain age before you can withdraw your money.
Another potential downside of 457s is that they may not offer the same level of tax benefits as 401ks. This is because contributions to a 457 are made with after-tax dollars.
So, while you won't have to pay taxes on your contributions when you retire, you will have to pay taxes on any earnings. This is something to keep in mind when comparing the two options.
Finally, it's important to remember that 457s are subject to the same rules and regulations as other retirement plans. This means that if you withdraw your money early, you may be subject to penalties or taxes. So, be sure to consider all of the potential disadvantages before making a decision.
What Are The Disadvantages of 401k?
There are a few disadvantages of 401k that should be considered before making a decision.
Firstly, 401k plans can be quite complex and confusing to understand. This means that it can be difficult to make the best investment choices without professional help.
Secondly, fees associated with 401k plans can eat into your returns. Finally, there is always the risk that your employer will terminate the plan or go bankrupt, which would leave you without any retirement savings.
So, Which One Should You Use?
There's no easy answer when it comes to choosing between a 457 and a 401k. Both have their advantages and disadvantages, and the best option for you will ultimately depend on your unique financial situation.
If you're still not sure which one is right for you, speak to a financial advisor who can help you make the best decision for your needs.
What Are Some Alternatives to Using a 457 or a 401k?
There are a few alternatives to using a 457 or 401k. One is to use an IRA, which is an individual retirement account.
Another option is to use a Roth IRA, which is similar to a traditional IRA but offers tax-free growth and withdrawals. Lastly, you could also invest in stocks, bonds, and other assets outside of a retirement account.
What Are Some Tips For Using a 457?
Some tips for using a 457 include contributing as much money as possible to the account and investing in a variety of different assets. Additionally, it is important to keep track of the account balance and make sure that withdrawals are made in a tax-efficient manner.
What Are Some Tips For Using a 401k?
There are a few key things to keep in mind when using a 401k.
First, make sure you're contributing enough to get the employer match if offered. Second, invest in low-cost index funds that track the market. And finally, don't withdraw your money until retirement.