Comparing 403(b) and 457(b) Plans | Rodgers & Associates

Understanding 403(b) and 457(b) Plans

Public-sector and non-profit organi­za­tions don’t offer 401(k) plans for their employees to defer income until retirement. However, tax-exempt and non-profit organi­za­tions like schools, hospitals, and religious groups can offer another type of employer sponsored plan: 403(b) and 457(b) plans. It is not uncommon for an organi­zation to offer these types of plans. This is a quick overview of both plans.

What is a 403(b) Plan?

A 403(b) plan is very similar to a 401(k) plan offered by for-profit businesses. 403(b) plans are a type of defined-contribution plan that allows employees to shelter money on a tax-deferred basis for retirement. The history of these plans dates to 1958 when they were known as tax-sheltered annuities or tax-deferred annuities. The plans could only be invested in annuity contracts and were most commonly used by educa­tional insti­tu­tions.

Today, many 403(b) plans are still funded with annuity contracts but plans now offer mutual fund choices as well. Fixed and variable contracts and mutual funds are the only types of invest­ments permitted inside these plans. Securities such as stocks, REITs and UITs are prohibited.

Contri­bution limits for 403(b) plans are identical to those of 401(k) plans. Income deferred by employees is on a pretax basis which reduces their adjusted gross income. For 2018, the annual contri­bution limit is the lesser of the employee’s compen­sation or $18,500. An additional catch-up contri­bution of $6,000 is allowed for workers age 50 and above.

A unique feature of 403(b) plans is a special additional catch-up contri­bution provision known as the lifetime catch-up provision, or 15-year rule. A worker who has at least 15 years of tenure and has contributed an average of $5,000 per year or less is eligible for this provision. The special provision allows for an extra $3,000 payment each year.

Employers can make matching contri­bu­tions. In 2018, total contri­bu­tions from employer and employee cannot exceed $55,000. After-tax contri­bu­tions are allowed in some cases, and Roth contri­bu­tions are also available for employers who opt for this feature. Eligible partic­i­pants may also qualify for the Retirement Saver’s Credit.

403(b) Rollovers

Employees can take their 403(b) plans with them to another employer or roll their plans over into a self-directed IRA. They can roll them over into another 403(b) plan, a 401(k) or other type of qualified plan.


403(b) plan distri­b­ution rules are similar to 401(k) plans in most respects. An employee can start taking distri­b­u­tions at age 59 ½, regardless if they are still working or not. Any distri­b­u­tions taken before age 59 ½ would be subject to a 10% early withdrawal penalty (unless a special exception applies). All normal distri­b­u­tions are taxed as ordinary income at the taxpayer’s tax bracket.

Required minimum distri­b­u­tions (RMD) must begin at age 70 ½ unless the plan is rolled over into a Roth retirement plan. Failure to take the RMD will result in a 50% excise tax on the amount that should have been withdrawn. Employers can offer loan provi­sions. The rules for loans are also similar to those for 401(k) plans. Employees cannot borrow more than the lesser of $50,000 or half of their plan balance. A loan that is not repaid within five years is treated as a taxable or premature distri­b­ution.


403(b) plans have no vesting provi­sions. Creditor protection is now at the same level as other qualified plans. A big consid­er­ation for any plan is the investment choices and the costs and fees being charged by the plan and investment providers. The plan admin­is­trator must provide a complete breakdown of these fees to all plan partic­i­pants.

What is a 457(b) Plan?

457(b) plans have the same contri­bution limits as 403(b) plans. Employees can contribute up to $18,500 in 2018 and an additional $6,000 if they are older than 50. The unique feature of a 457(b) plan is the special catchup provision when an employee is within three years of normal retirement age. Quali­fying employees may contribute up to $36,000. There’s also another catch-up option which allows an employee to contribute, “the basic annual limit plus the amount of the basic limit not used in prior years (only allowed if not using age 50 or over catch-up contri­bu­tions) .”

Unlike the 403(b), whatever match an employer contributes will count as part of the employee’s $18,500 maximum contri­bution. If the employer contributes $5,000, the employee can only contribute $13,500 (unless the employee is eligible to partic­ipate in one of the catch-up strategies. However, employers rarely provide matching programs within 457(b) plans.

457(b) Rollovers

Employees can take their 457(b) plans with them to another employer or roll their plans over into a self-directed IRA. They can roll them over into another 457(b) plan, a 403(b) or other type of qualified plan.


Employees cannot take distri­b­u­tions from their 457(b) plan until they are age 70 ½ if they are still working. Once the employee has termi­nated employment, distri­b­u­tions can be taken at any time regardless of the employee’s age. Distri­b­u­tions from a 457(b) before age 59 ½ are not subject to the 10% early withdrawal penalty. All distri­b­u­tions are taxed as ordinary income at the taxpayer’s tax bracket. RMD rules apply to 457(b) plans even though they are not catego­rized by the IRS as qualified. Distri­b­u­tions must begin at age 70 ½.

A 457(b) has the better catch-up policy of the two which allows an older employee to put away more money for retirement. 403(b) plans usually have a larger amount of investment options to choose from. The good news is that an employee who is eligible for both plans could contribute to both. That means an employee could save $39,000 in 2018, not including any catch-up contri­bu­tions.

Rick’s Tips:

  • 403(b) and 457(b) plans are very similar to 401(k) plans.
  • 403(b) plans have no vesting provi­sions on employer contri­bu­tions like some 401(k) plans.
  • Distri­b­u­tions from a 457(b) before age 59 ½ are not subject to the 10% early withdrawal penalty.

Internal Revenue Service Publi­cation 4484