What Is the Difference Between 403(b) and 457(b) Plans?

You cannot rely on your pension alone to take care of you during retirement. This is why retirement savings plans are a great way for you to put money aside so you can enjoy your retirement.But with so many plans out there, how can one make an informed decision on which to choose?In today’s post, we will talk about the difference between two popular retirement savings plans: the 403(b) plan and the 457(b) plan.What is the difference between the two? Who is eligible to participate in these plans? What are the contribution limits for each? How about pros and cons?By the end of this post, you will know the difference between a 403(b) and a 457(b) plan and which one may be best-suited for you.

A 403(b) plan is also called a tax-sheltered annuity (TSA) plan.It is a retirement plan for:The contribution limit for a 403(b) plan in 2019 is $19,000. If the person is over 50 years old, they can contribute up to $6,000 more if they want to catch up with their retirement savings.Individual accounts in a 403(b) plan can be set up in the following ways:

The advantages of contributing to a 403(b) plan include:

People who work with state and local governments can participate in the 457(b) plan.Employees working at certain tax-exempt organizations under the Internal Revenue Code 501 are also eligible to contribute to a 457(b) plan.In 2019, employees with a 457(b) plan can contribute up to $19,000 to their plan. If you are within 3 years of the normal retirement age, under this plan, you can contribute up to $38,000 extra in 2019. If you are over 50 years old, you can also put in an extra $6,000.From this provision alone, you can see that compared to the 403(b) plan, you can contribute more money to a 457(b) plan.There are significant advantages available to people who contribute to a 457(b) plan. Those advantages include the facts that both contributions and earnings made on retirement money are tax-deferred.If it is allowed, a participant in a 457(b) plan can make Roth contributions to his or her retirement. This way, the participant pays taxes before contribution and thus they will not have to pay taxes on interest and earning during retirement.The thing to note here is that because this plan is offered to state and local government employees, the chances of employer matching are usually low.When employers do match, however, it is into whatever the allowable employee contribution is.So for instance, if an employer contributes $5,000 to the plan, the participant/employee can only contribute $15,000 in 2019.

The 403(b) and 457(b) plans are similar in the fact that they can be offered to employees who work in the public sector such as governmental organizations and tax-exempt organizations/non-profit organizations.Another similarity is that contributions and earnings in both plans are tax-deferred until the contributor starts making withdrawals.They also both have catch-up plans based on certain stipulations.

From a pure which-one-of-these-will-make-me-the-most-money standpoint, a 457(b) plan is a better option than a 403(b) plan simply because you can contribute more money to it.Here’s how they differ:

If you work in any of the areas already mentioned, chances are your employer can offer you a 403(b) and/or a 457(b) plan.In this post, my goal was to lay out the differences between the plans because it does get confusing.Are you currently participating in either plan? Let us know in the comments below.

Written by Investors Wallets

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