Well well well…we find ourselves back speaking about retirement accounts.
I cannot tell you how amazing it is to field so many questions from young people about what types of retirement account there are, what they should do, etc. Hearing people ask about saving for the future is incredible especially when you hear statistics like over 50% of all Americans have zero dollars in any retirement/savings account.
Wealth can be attained by anyone in my opinion. However, it does not come overnight. Small correct decisions over and over and over again until we are blue in the face is the way to attain wealth over time. Obviously, part of this is saving/investing for the future. We will take our next crack at this whole retirement account thing by comparing 403b vs 457b accounts.
A 403b account is very similar to a standard 401k account however it is not available to just anybody walking down the street. A 403b account is a retirement savings plan available to those in the following industries:
- Public education employees (college, etc)
- Non-profit employees (of 501c’s)
- Hospital employees
- Religion employees (clergy, etc)
There are two types of 403b accounts similar to those of a 401k. We have the traditional 403b account which takes pre-tax earnings from each paycheck and puts them towards the account. The funds grow (hopefully) tax-free and are not taxed until withdrawn. At the same time, there is a Roth 403b account which is the opposite in terms of when tax events occur. For a Roth 403b, contributions to the account are not taxed, however, they do grow tax-free and are not taxed when withdrawn.
403b accounts used to only be for purchasing annuities however that is no longer the case. They are now not limited to any investment choice.
457b plans are offered to the following employees:
- City employees
- State employees
- Government employees
- Government contractors
The interesting thing to note here are the types of people that are able to have this 457b plan. They are those who for the most part are government workers. Government workers typically have a pension associated with their jobs and a 457b plan is a very nice thing to be able to have on top of the pension that you get for being a government employee. Double the income during retirement? And that income has grown tax-free the whole time? Sign me up!
Similarities of 403b vs 457b
Both the 403b and the 457b plans have traditional and Roth options. In both cases, funds in the accounts will grow tax-free.
Differences of 403b vs 457b
While both have a standard catch-up amount of $5,500 for those 50 years or older, they do differ in the “bonuses” on top of that. For a 403b plan, you are able to add an additional $3,000 a year up to a $15,000 lifetime maximum if you are over 50 years old and have been with the same employer for 15 years or more.
On the other hand, a 457b plan allows those within three years of their retirement age (predetermined for government workers), to be able to contribute up to $36,000 to that account. That is an astounding number. Up to $108,000 in just three years in a retirement account is out of this world.
Access to Funds
For a 403b plan, you are able to begin accessing and withdrawing funds from the account after the age of 59 and a half. This is very similar to 401k’s and IRA’s. In some cases, hardship withdrawals may be available before this as defined by the IRS.
457b plans, on the other hand, do not give access to withdrawals until the employee has reached 70 and a half years old. This is a full 11 years after the 403b plan recipient is able to accept their funds.
For a 403b plan, there is a 10% penalty on withdrawals before the age of 59 and a half.
For a 457b plan, there is no penalty on withdrawals regardless of age. Wow!
Who is the Winner?
In the battle of 403b vs 457b, we do not believe there is a winner as it is rare to have the potential to have both plans. These plans typically don’t compete against each other in terms of contributions as they are available to different employees.
403b plans seem very similar to the standard 401k plans. The difference between the two seems to be the extra catch-up amounts available for those enrolled in the 403b plan.
However, it looks like the 457b plan is a real gem. For starters, those who are eligible (government employees) typically already have a pension lined up for retirement. The 457b plan would be an additional source of income during retirement. That is great.
On top of this, those enrolled in a 457b plan also have a very large catch-up up plans where in their last three years of employment they can contribute over $100,000. That is truly massive.
And just to do one better, the 457b plan does not have any penalties associated with early withdrawals. That is almost too good to be true.
403b vs 457b? I’ll take either please. But as always, we recommend maxing out all of the potential retirement accounts available to you.