The 457(b) Retirement Plan is tax-advantaged for specific federal and state employees. They are municipal employees, civil servants, workers in unions and charities, and certain employees who work under contract.
The benefit of 457(b) Retirement Plan is that the employees are not required to pay the capital gain taxes. As a result, the plan provides additional tax-efficient growth, which will eventually help your retirement savings.
Although there are chances for employers to match their employees' contributions, most of the time, they do not practice such acts in the case of 457(b). Furthermore, comparing the employer contribution may lead to a maximum contribution limit.
For example, if your employer contributed $10,500 to your 457(b) plan, you were allowed to add only $10,000 as the contribution limit for 2022 is $20,500.
The 457(b) plan requires regular deductions from your wages to fund the plan. However, annual contributions and additional contribution to an individual’s account has a limit. They are the following:
Both the 457(b) and the 403(b) will provide you with tax benefits in retirement. The contribution limitations, employer contributions, catch-up contributions, fees, and investment options of a 403(b) and a 457(b) plan should be considered when making a decision.
If your company policy permits it, contributing to both might significantly increase your retirement fund. Otherwise, selecting only one plan can also be enough. The key differences between these two seemingly similar strategies are outlined below.
The employer may contribute to the employee's 403(b) or 457(b) plan. However, unlike 401(k) plans, employer payments are not typical.
The 457(b) doesn't have an employer contribution cap, while the 403(b) cap is substantially larger. For example, in 2023, total contributions to a 457(b) plan are capped at $22,500, but contributions to a 403(b) plan can reach $66,000, including the employee's own $22,500.
The general withdrawal restrictions for 403(b) and 457(b) plans are the same: you can only withdraw your money penalty-free once you reach age 59 and a half. However, if you quit the company contributing to your 457(b), you can begin taking withdrawals without incurring penalties at any time.
Catch-up contributions are welcome in both schemes. For example, after 15 years with the same company, you may be eligible to make a 403(b) contribution of up to $15,000. Then, if you still need to do so, you can double your yearly contribution limits for 457(b)s in three years before federal retirement age.
While 401(k) plans provide a wide range of investment alternatives, both programs have fewer choices. For example, mutual funds and annuities are the two most common investments.
Therefore, you should be able to build a simple 3-fund portfolio. Still, if your plan's investment selections are limited or fees too high, consider opening an IRA after contributing the maximum allowed to your employer's plan. Otherwise, you can also try out theother retirement plans.
Another retirement plan option that shares some similarities with the 403(b) is the 401(k) plan. Although 401(k) and 457(b) have the same features in Roth and Loan Provisions, there are some differences between these two plans.
In the case of Roth options, it is available for both 401(k) and 457(b) plans. Similarly, Loan provisions are allowed when you need to temporarily withdraw an entire or some amount of money from the fund before your retirement starts.
All of the benefits of a 401(k) are available under the 457(b) plan, yet some changes exist.
The 457(b) is distinct from other tax-advantaged retirement plans in a significant way: there is no penalty for early withdrawals under certain conditions.
In addition, withdrawals from a 457(b) plan are tax-free for participants who have stayed with the same employers. However, "unforeseeable crises" are the only item on the list that can be used to justify a time off.
A 10% penalty is applied to early withdrawals from a 457(b) if the account holder transfers the money to another tax-advantaged retirement account, such as a 401(k) (k). For instance, this would happen if a public servant left their post to work in the private sector.
Contributions to a traditional plan, as opposed to a Roth plan, are taken out of a worker's paycheck before taxes are paid. Instead, that sum is deducted from the worker's gross income, reducing the worker's taxable income for the year.
Here are the drawbacks you may experience if you want to be a part of the 457(b) retirement plan.
The employer match offered by most tax-advantaged retirement savings programs is one such benefit. In addition, an employee's contribution to the plan may receive some employer-matching funds.
For instance, if the company matches the first 3% of the employee's assistance, the employee will receive a 3% pay boost.
Employer contributions are uncommon in government employment.
There is a two-year vesting term. After that, the money is forfeited if the worker leaves. Fewer investment options than private sector plans.