Retirement 101: 403(b) and 457(b) retirement plans and how they differ from 401(k)s

by Ron Haynes

403(b) plans are similar to 401(k) plans but are reserved for employees of tax-exempt nonprofit organizations, such as public schools, hospitals, foundations, charities, and churches and other religious organizations. Like 401(k)s, 403(b)s allow you to set up tax-deferred accounts and invest in mutual funds, stocks, bonds and various other investments.

403(b)s vs. 401(k)s

There are two major differences between 403(b) plans and 401(k) plans:

  • Company match: 401(k) plans offer company-matching contributions much more often than 403(b) plans do.
  • Company management: Companies that offer 403(b) plans are not required to be involved in the management or administration of the plans. As a result, 403(b)s often leave you with more freedom to manage your accounts, but also with less guidance.

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Key Traits of 403(b) Retirement Plans

All of the major features of 403(b) plans—tax benefits, eligibility, vesting, contribution limits, and so on—mirror those of 401(k) plans. Moreover, 403(b)s work the same way as 401(k) plans: you invest pretax dollars, and the assets in the account grow tax-deferred. Or, under the Roth 403(b) variation, you invest after-tax dollars that grow tax-deferred and are tax-free upon withdrawal.


The Special 403(b) Catch-Up Provision

The “catch-up” provisions for 403(b)s mirror those of the 401(k) retirement plan – if the employer matches contributions, the annual maximum the employee can contribute is the standard $17,000 plus a “catch-up” amount of $5,500 (employers are maxed at $33,000). The one unique trait of 403(b)s is a “catch-up” provision available only to employees with 15 or more years of service with a qualified organization. If you qualify, this provision increases your contribution limit by up to $3,000 per year, up to a total lifetime catch-up limit of $15,000. If you’re over age 50, you can combine this catch-up provision with the more universal $5,500 per year catch-up contribution, which would enable you to contribute a total of up to $26,500 (for 2012) annually to your 403(b) plans.

457(b) Retirement Plans

457(b) plans are very similar to 401(k)s and 403(b)sbut are available only to U.S. government employees and employees of certain nongovernmental tax-exempt U.S. employers, such as public schools and universities.

457(b)s vs. 401(k)s and 403(b)s

457(b) plans are similar to 401(k)s and 403(b)s, with the following major exceptions:

  • Withdrawal penalties: Assets in 457(b) accounts are not charged a 10% penalty for withdrawal before age 59 1/2.
  • Special catch-up provision: 457(b) plans also offer a unique catch-up provision. If you’re within three years of retirement (as defined by your specific plan), you can double your usual catch-up contribution amounts, under certain conditions.
  • Multiple plans: Most employers who offer 457(b) plans also qualify to offer 401(k) or 403(b) plans. If you’re an employee of such a company, you can contribute up to the maximum contribution limits of both plans. In addition, if you’re over age 50, you can contribute the special additional catch-up amount into both your 403(b) and 457(b) plans.

About the author

Ron Haynes has written 988 articles on The Wisdom Journal.

The founder and editor of The Wisdom Journal in 2007, Ron has worked in banking, distribution, retail, and upper management for companies ranging in size from small startups to multi-billion dollar corporations. He graduated Suma Cum Laude from a top MBA program and currently is a Human Resources and Management consultant, helping companies know how employees will behave in varying situations and what motivates them to action, assisting firms in identifying top talent, and coaching managers and employees on how to better communicate and make the workplace MUCH more enjoyable. If you'd like help in these areas, contact Ron using the contact form at the top of this page or at 870-761-7881.

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