Benefits of 403b VS 457 plan
403b vs 457 Plans
It is always important to begin saving for your retirement as early as you can. This is because you never know the situation you will be in when you retire. To be on the safe side, ensure that you are never too late since it is never too early to do this. Even if you have just been employed to work for a company or working for some time, you should take advantage of the opportunity you get and select the retirement savings options that is best for you.
You may have different retirement savings options, but the best ones are tax-favored, and employer-sponsored retirement savings plans. Your employer may offer certain contribution plans, and therefore, you can defer a certain percentage of what you earn towards your retirement. Two types of plans that are available are the 403b and 457 plans.
What is a 403b Plan?
This is a retirement savings plan that is usually tax-advantaged and is typically given to the employees and workers in the public sectors and non-governmental organizations. This plan is mandatory for some employees and workers, while to others, it is optional. This plan is similar to a 401k plan since both of the plans collect pretax contributions, and when you withdraw your money when you retire, the money gets taxed. There is no one between the employers and the employees who cannot contribute to this plan.
If you withdraw from this retirement plan before you are 59½, there are typically early withdrawal penalties for this. Aside from ordinary income taxes due on the money you receive, you must also pay a 10 percent early withdrawal penalty. Therefore, this means that you have to ensure that you wait until you are of age to make your withdrawals.
Benefits of 403b plan
The fact that the contributions made to this retirement plan are pre-tax, makes this the biggest benefit of this plan. This means that you are not expected to pay any taxes when you make your contributions to your retirement plan until when you will be withdrawing your money.
The retirement plan has tax-deferred gains
The main reason why you contribute to the retirement plans is to ensure that you invest for a long time before you retire. If you invest in assets such as stocks, you will earn profits known as capital gains, while if you sell the shares, you get an amount that is higher than what you contributed. The government will impose taxes on your capital gains, but when it comes to the 403b plan, you are not expected to pay any taxes for what you contribute towards the plan.
What is a 457 plan?
Like the 403b plan, the 457 plan is also tax advantageous for employees in the public sector. This retirement plan allows employees to defer a certain percentage of their salary into their retirement savings. The money funded to this plan is usually pretax, and once you withdraw the money during retirement, it will be taxed. In case things take the turn for the worst, you can make withdrawals before the age of 59½, as long as you either leave your place of employment or have a qualifying hardship.
Benefits of 457 plans
It allows participants to contribute more
The retirement plan allows its participants to double what they make defer for their retirement contribution. Therefore, if you are within three years of the obvious retirement age, you can contribute double what you normally contribute. Also, if you are at least 50 years of age, you can put an extra amount of money into your plan, which can amount to at least $6,500.
Distributions are allowed
Most of the retirement plans do not allow their participants to make distributions unless they are 59½ years old. When it comes to the 457-retirement plan, things are quite different. This is due to being able to access your benefits when you are not an employee since you cannot make contributions to this plan. However, if you have a job, distributions are only permitted to 70½ year old participants or during any unforeseeable emergencies.
No penalties for withdrawing before you reach the age of 59.5 years
You can withdraw your money from your retirement plan before you are aged 59½ without getting penalties, unlike other retirement plans.
Rolling over an account into IRA is allowed
In case you left your job, rolling over your account into a 401k or IRA is allowed. However, only the 457b participants get this chance.
The differences between 403b and 457
These two types of retirement plans have several features that make them different from each other. These features are especially important when you are selecting the retirement saving plan that is best for you. The features are discussed in the section that follows below.
The people who are eligible for the 403b retirement plan are the employees in public schools, who participate in schools or employees' daily operations in the public schools managed by the government. Employees in the medical centers involved in the 501(c)(3) organizations, civilian faculty, ministers, and staff in the Uniformed Service University of Health Science are also eligible to the plan. However, they must meet the above conditions. When it comes to the 457 plan, any local and state government employees are eligible for this plan but must fall under the 457b plan.
Contributions to the plans
Unlike the 403b plan, 457 plans allow its participants to make special contributions, especially if they are within their three years of the normal retiring age. The 403b plan also provides participants who have been working at the same place and making contributions over 15 years with certain provisions. For instance, the participants contribute more than $3,000 per year as long as they contributed no-less than $5,000 in the past 15 years.
Any withdrawals from these retirement plans, you will be taxed on the amount you withdraw. However, if you want to withdraw from a 403b account before you are aged 59½, you get a 10% tax penalty for the early withdrawal, but when you do the same thing in your 457b account, you don’t need to worry about such penalties.
The people who offer the plans
Public schools or organizations under 501(c)(3) are allowed by the IRS to offer the 403b plan, while the 457 plan is offered by the state government and local government employers.
The type of retirement plan you select will always be determined by the type of organization or company you are working for. You have to note that you lack control over the retirement plan that your employer provides for their employees. However, you are in control of the whole idea of saving for your retirement. Both the plans discussed above are similar in some ways, but you have to ensure that you find out whether you are eligible for these plans before selecting the best for you.