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Navigating Retirement Plans: 403(b) and 457 Plans for Educators

Navigating Retirement Plans: 403(b) and 457 Plans for Educators

| February 05, 2024

When it comes to planning for retirement, educators often find themselves facing multiple options. Two common choices for teachers in the public-school districts are the 403(b) and 457 plans. While both plans are designed to help educators build a secure financial future, they differ in key aspects that every educator should understand.

403(b) Plan:

The 403(b) plan, often referred to as a Tax-Sheltered Account (TSA) or a Tax-Deferred Account (TDA), is a retirement savings plan available to employees of public schools and certain tax-exempt organizations. Here are some key features of 403(b) plans:

  1. Tax-Advantaged Contributions:
  • Contributions are made on a pre-tax basis, reducing your taxable income in the year you make the contribution. Some plans may allow for Roth contributions. 
  • Earnings within the plan grow tax-deferred until withdrawal during retirement.
  1. Contribution Limits:
  • As of 2024, the annual contribution limit for a 403(b) plan is $23,000. For those over 50, catch-up contributions are allowed.
  1. Withdrawal Rules:
  • Withdrawals before the age of 59½ may incur a 10% early withdrawal penalty.
  • Required Minimum Distributions (RMDs) must begin by April 1 of the year following the year you reach 73, or the year you retire, whichever is later.

457 Plan:

The 457 plan, also known as a Deferred Compensation Plan, is another retirement savings option available to public sector employees, including educators. Here are some key features of 457 plans:

  1. Dual Types:
  • Governmental 457(b) plans are offered by state and local governments.
  • Non-governmental 457(b) plans are available to certain non-profit organizations.
  1. Flexible Withdrawals:
  • The 457 plan is flexible with withdrawals. Participants can access funds penalty-free upon separation from service, regardless of age.
  • Early withdrawals may still incur income tax but no additional penalty.
  1. Additional Catch-Up Contributions:
  • The 457 plan allows participants within three years of the plan's normal retirement age to contribute up to double the annual limit, provided they haven't maximized contributions in previous years.

Choosing the Right Plan:

While both plans offer valuable tax advantages, the choice between a 403(b) and a 457 plan often depends on individual circumstances and financial goals. Educators should carefully consider factors such as contribution limits, withdrawal rules, and employer-specific offerings before deciding. By learning about the specifics of the 403(b) and 457 plans, educators can make informed choices that align with their unique financial objectives. If you are curious about which retirement plan is best for you, schedule a meeting with Anne Murray on our website using this link or email her at anne@pfsnh.com.