457 Plan vs. 403(b): What’s the Difference?

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Employees of nonprofits and governments can benefit from 457 and 403(b) tax-advantaged retirement plans, but each plan has some differences to consider before you invest.

Most employees won't have to choose between a 457 or 403(b) plan because most only qualify for one type of plan. However, if you have the option to pick between a 457 and a 403(b), consider the advantages and disadvantages of each plan. Here's what you need to know.

What Is a 457 Plan?

A 457 plan helps state and local government employees and some nonprofit employees invest for retirement. Participants automatically defer a portion of each paycheck into a retirement account, where their money grows tax-free until it's withdrawn in retirement.

In order to qualify for a 457 plan, you'll need to work for an employer who sponsors the plan. There are two main types of 457 plans to be aware of:

  • 457(b) plans are designed for public sector employees like municipal employees and civil servants. 457(b) plans are the more common 457 plan.
  • 457(f) plans are available to some hospital and nonprofit executives. These may be offered to top-level executives at certain nonprofits as a way to attract and retain talent.

457 Plan Contribution Limits

For the 2022 tax year, the annual contribution limit for a 457(b) account is $20,500.

Note that your 457(b) contributions can't exceed your includible compensation, which is the compensation you received from the employer that sponsors the plan.

457(b) plans also offer special catch-up contributions (see below).

There is no dollar limit for contributions to a 457(f) plan. However, contributions to a 457(f) plan are at substantial risk of forfeiture, meaning employees can lose the money in the plan if they don't remain in the position for a given period of time, such as two years. This stipulation, sometimes referred to as "golden handcuffs," is specific to 457(f) plans and won't affect employees with other types of retirement accounts, including 457(b) plans and 403(b) plans.

457 Plan Pros

  • Tax-advantaged growth: Your 457 contributions grow without tax until you withdraw the money in retirement.
  • Easy rollover: If you leave your position, you can easily move your 457 balance into a 401(k) or IRA.
  • Catch-up contributions: Employers age 50 and older contributing to a 457(b) plan may be eligible to make catch-up contributions up to $6,500 in 2022. Some 457(b) plans also offer special catch-up contribution rules for employees within three years of retirement age. If you qualify, you may be able to contribute up to twice the annual limit or the annual limit plus eligible money you didn't contribute in prior years. If your plan allows both standard catch-up contributions and the special three-year catch-up, you can use whichever one allows you to contribute the most, but you can't use both.
  • Flexible withdrawals: Unlike many other types of retirement accounts that penalize early withdrawals, employees who leave their employer can withdraw their funds without facing a 10% penalty. (You'll still owe income tax on withdrawals, however.) This flexibility may be a perk, although you should avoid tapping into your retirement funds to maximize your retirement savings.

457 Plan Downsides

  • Employer matches count towards contribution limit: If your employer offers to match your 457 plan contributions, their match will count towards your annual contribution limit.
  • 457(f) forfeiture: If you have a non-governmental 457(f) plan, you're at risk of losing the money in the plan if you leave your job within a certain period of time.

What Is a 403(b) Plan?

403(b) plans, like 457 plans, are tax-advantaged retirement accounts offered only by certain employers. Unlike 457 plans, 403(b) plans are available to certain employees of public schools, nonprofits and religious organizations.

403(b) Plan Eligibility Requirements

In order to qualify for a 403(b) plan, you'll need to work for an employer who sponsors the plan. These employers include public educational institutions like public schools, colleges and universities, certain tax-exempt organizations and some churches.

403(b) Plan Contribution Limits

For the 2022 tax year, the annual contribution limit for a 403(b) account is $20,500. Like a 457 plan, your 403(b) contributions can't exceed your includible compensation.

403(b) plans also allow for special catch-up contributions (see below).

403(b) Plan Pros

  • Tax-advantaged growth: Your 403(b) contributions grow without tax until you withdraw the money in retirement.
  • Easy rollover: If you leave your position, you can transfer your 403(b) balance into an IRA without penalty. You can also bring your balance with you to another employer-sponsored retirement account, like a 401(k) account or another 403(b) account.
  • Special 403(b) catch-up: Employees age 50 or over who invest in 403(b) plans may be eligible to make catch-up contributions up to $6,500 in 2022. Employees with 15 years of service at their employer may qualify for an additional catch-up contribution of $3,000 per year.

403(b) Plan Downsides

  • Early withdrawal penalties: Just like 401(k) or an IRA accounts, most 403(b) withdrawals before age 59½ are subject to a 10% early withdrawal penalty.
  • Possibility for high fees: Some 403(b) plans are associated with high fees, especially those that deal mainly in annuities. However, an increasing number of 403(b) plans offer lower cost mutual fund products.

Key Differences Between a 457 Plan and a 403(b) Plan

The major differences between 457 plans and 403(b) plans is their treatment of catch-up contributions and withdrawal rules. If you have the option to choose between the two plans, you should consider these factors when determining which is better for you.

  • Catch-up contributions: While both 457(b) and 403(b) plans allow contributions up to $20,500 per year or the employee's maximum includable income, they differ in their treatment of catch-up contributions. Both plans may allow employees aged 50 and older to make additional annual catch-up contributions of $6,500 per year (in the year 2022). However, 457(b) plans may allow employees to make special catch-up contributions within three years of retirement that can double what they're eligible to contribute. 403(b) plans may offer a special 15-year catch-up rule that allows employees with 15 years of service or more to make an additional $3,000 contribution per year.
  • Withdrawal rules: Most retirement accounts require you to wait until age 59½ to withdraw your funds without being hit with a 10% penalty. While 403(b) plans are both still subject to this rule, 457(b) plans differ in that employees may be able to withdraw their funds without penalty if they no longer work for the employer who sponsored the plan.

Which Plan Should You Choose?

Most people won't have to choose between a 457(b) and a 403(b) because most workplaces sponsor only one plan. If you do have the option to choose, your first priority should be exhausting your employer's contribution match, if they offer one. If your employer matches your contributions to one account but not the other, start by funding that account up to your employer's maximum match.

After you've exhausted the match, consider your career plans. If you plan to remain with the same employer for 15 years or more, the 403(b) 15-year catch-up contribution rule may allow you to contribute more pretax money. On the other hand, if you'll continue to work for your employer until within three years of retirement age, the double contributions a 457 plan offers these employees can help you invest more before you retire.

Can You Have Both a 457(b) Plan and a 403(b) Plan?

If your employer offers both a 457 and a 403(b) plan, it's possible to invest in both.

Investing in both a 457 and 403(b) plan will allow you to contribute more tax-advantaged money. The contribution limits for each plan are separate, meaning you can fund both accounts to their maximum.

The Bottom Line

Investing your money is essential for attaining financial freedom in retirement, and employer-sponsored retirement accounts can help. Both 403(b) and 457 plans allow you to invest money on a pretax basis. If you're not sure what you qualify for through your workplace, consult your employer's human resources department.

If you need additional help considering what investment options work best for you, reach out to a financial advisor to come up with a plan for your money.

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