403(b) & 457 Plans
403(b) and 457 plans are both tax-advantaged retirement savings plans that are offered to public school employees. These employer-sponsored retirement plans that are typically funded with pre-tax salary deferrals, meaning the contributions are tax-free and the distributions taken in retirement are taxed as income. In some instances, there may also be the opportunity to make after-tax, or Roth contributions.
Some school districts offer their employees the option to contribute to either a 403(b) or a 457 retirement savings account. So that begs the question, what are the differences between the two plans and which should you be contributing to?
How are 403(b) & 457 plans different?
One of the primary differences between the two plans is the 457 plan’s lack of an early withdrawal penalty. As long as you have separated from service with the original provider of the 457, you can withdraw all or a portion of your 457 at any time or age. Whereas funds in a 403(b) that are withdrawn before you turn 59 ½ will incur a 10% penalty fee.
This is one reason many younger employees opt for a 457 as opposed to a 403(b). Those who are farther from retirement age may be more likely to need to tap into their retirement account for expenses such as a down payment on a house, or a child’s college tuition.
When determining which plan is best for you, you must also consider which investment options are offered. Your school’s 457 plan does not necessarily offer the same investment options as your 403(b) plan. You may find that one set of investment offerings is more suited to your financial goals than the other.
Contributing to Both Plans
If your employer offers both a 403(b) and a 457, you can opt to make contributions to both plans. And, you are still eligible to make the maximum contribution to each. For 2019 that max is $19,000. So, you could conceivably contribute a total of $38,000 if you are participating in both plans. Additionally, if you are over the age of 50, you can make an additional catch-up contribution of $5,000 to each account, bringing your grand total up to $48,000 annually if you were to max out contributions to both plans.
Read more about 2019 retirement plan contribution limits here.
As with any personal finance decision, this might be a good time to consult a financial professional- and I would recommend consulting with someone who works with educators on a regular basis and understands the ins-and-outs of your school’s plan and how it factors in with any pension you will receive in retirement.
As always, if you have any questions about this topic, or want to discuss your own retirement planning - you can feel free to call my office and we would be happy to help.
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