By Dan Miller, CFP®
If you are employed by certain types of non-private organizations, you may have access to a few different types of retirement plans. The 403(b) plans are typically offered to those who work for public educational institutions, such as public schools, colleges and universities; certain types of non-profits and church or church-related organizations.
457(b) plans are most often offered for those employed by state or local government agencies and other non-profit organizations. In some cases, your employer may offer both and allow you to contribute to both types of accounts.
Much like a traditional 401(k) plan, 403(b) and 457(b) plans allow you to put aside tax-deferred money into different types of investments for retirement. We’ll explore both plan types below to help you decide the best way to put aside money for retirement.
403(b) plans are offered by public schools and certain non-profit, tax-exempt organizations. 403(b) plans may also be referred to as a TSA plan (tax-sheltered annuity) or a TDA plan (tax-deferred annuity).1 When these plans were created, investing in annuities was the only option. However, many 403(b) plans have now expanded to include mutual fund investment options as well.1, 2
Benefits of a 403(b)
The annual contribution limit for 403(b) plans for 2021 is $19,500, with an option to invest an additional $6,500 in catch-up contributions for employees who will be age 50 years or older by the end of the calendar year.2 While a 403(b) is funded primarily by the employee, employers may also choose to match contributions.2
Contributing to a 403(b) may incur higher administrative costs than a 401(k). Investment fees are typically paid for by the employee, but employers can opt to pay some or all of the administrative fees. Review your paperwork carefully to determine what fees, if any, you may be responsible for.
This plan is subject to the “universal availability rule,” which means that if your employer offers this retirement plan to one employee, it must be offered to all employees. However, there are some exceptions to this rule.2
If you meet any of the following criteria, you may be excluded from participating in the plan:2
- Employees who will contribute $200 or less annually
- Those employees who participate in a 401(k) or 457(b) plan or in another 403(b) plan of the employer
- Nonresident aliens
- Employees who normally work less than 20 hours per week
457(b) plans are offered by state and local governments, as well as select 503(c) non-profit companies. The investment options for 457(b) plans also include annuities and mutual fund investment options.3
Benefits of a 457(b)
Much like the 403(b) plan, the annual contribution limit for 457(b) plans for 2021 is $19,500.3 If a plan participant is within three years of normal retirement age, they may also participate in additional catch-up contributions.3 Normal retirement age is defined as being between ages 65-67 years, but with IRS approval can be as low as 62 years old. Confirm with your employer as to what they consider normal retirement age to determine if you’re eligible for additional contributions.
Your additional investment amounts can either be twice the annual limit, for a total annual contribution limit of $39,000 or the basic annual limit plus the amount of the basic limit not used in prior years.3 The latter option is only available if the participant is not using the 50 and over catch-up contributions.3
One of the most significant benefits of the 457(b) plans is that the money contributed is tax-deferred both when funds are contributed and when they’re withdrawn in retirement.3
Your employer may offer one or both of these types of plans. There may also be an option to invest in a designated Roth account, depending on the available options.4 It’s important to work with a financial advisor and your tax professional to determine what may be the right move for your retirement.