2025-2025 Guide: Compare 457 vs 403(b) Retirement Plans and Maximize Your Savings

Andy Smith, CFP®, is a seasoned financial planner, licensed realtor, and educator with over 35 years of experience in personal finance, corporate finance, and real estate. He has guided thousands toward achieving their financial objectives.

Historically, public sector employment guaranteed retirement income through pensions. Today, many public and nonprofit employers offer retirement savings plans like the 403(b) and 457, which function similarly to private-sector 401(k) plans.

Key Highlights

• Public and nonprofit employers typically provide 403(b) and 457 plans instead of 401(k)s.
• The 457(b) plan is designed for state and local government employees; the 457(f) targets nonprofit executives.
• 403(b) plans mainly serve private nonprofit and public education employees.
• Eligible individuals can contribute to both plans, splitting their contributions.

Understanding the 457 Plan

The 457 plan has two variants: 457(b) for government employees and 457(f) for nonprofit executives.

457(b) Contribution Limits for 2024-2025

In 2024, you can contribute up to $23,000, increasing to $23,500 in 2025. If you’re 50 or older, catch-up contributions allow an additional $7,500 each year.

The SECURE Act 2.0 raised catch-up limits for ages 60-63 to $11,250 in 2025.

Within three years of normal retirement age, you may contribute up to twice the annual limit, equaling $46,000 in 2024 and $47,000 in 2025. This maximum is the lesser of twice the limit or the annual limit plus unused prior year limits.

457(f) Plans: Executive Deferred Compensation

457(f) plans, often called "golden handcuffs," defer compensation for nonprofit executives without income limits but with a substantial risk of forfeiture. Benefits become taxable when vested, typically after a minimum two-year service.

Pros and Cons of 457 Plans

Advantages

• 457(b) allows doubling contributions near retirement.
• Catch-up contributions available after age 50.
• Funds accessible upon leaving the employer.
• Rollovers permitted into Roth IRAs or 401(k)s.

Considerations

• Employer matches count toward contribution limits.
• Matching programs are rare.
• 457(f) requires minimum two years’ service; early departure forfeits benefits.

Note: Contribution limits adjust annually for inflation via IRS cost-of-living updates.

403(b) Plans Explained

403(b) plans are tax-deferred retirement accounts mainly for employees of private nonprofits, public schools, and certain ministers. Established in 1958, they were originally tax-sheltered annuities but now offer broader investment options.

403(b) Contribution Limits and Features for 2024-2025

Contribution limits match 401(k) plans: $23,000 in 2024 and $23,500 in 2025, with $7,500 catch-up contributions for those 50+. Ages 60-63 qualify for a catch-up limit of $11,250 in 2025.

The lifetime catch-up provision allows employees with 15+ years of service to contribute an extra $3,000 annually, up to a $15,000 lifetime limit per employer.

Some employers permit after-tax and Roth contributions. Automatic enrollment is possible, with opt-out options. Eligible employees may also qualify for the Retirement Saver's Credit.

Contribution Limits Summary

Total combined employee and employer contributions cannot exceed $69,000 in 2024 and $70,000 in 2025.

Rolling Over Your 403(b) Plan

If you change jobs, you can roll your 403(b) into another 403(b), 401(k), or a self-directed IRA, consolidating your retirement savings.

Note that the 2024 Retirement Security Rule requires fiduciary advisors assisting with rollovers to act in your best interest and charge reasonable fees.

403(b) Distributions and Withdrawals

• Distributions can begin at age 59½.
• Early withdrawals before 59½ face a 10% penalty unless exceptions apply.
• Regular distributions are taxable as ordinary income; Roth distributions are tax-free after a five-year holding period.
• Required minimum distributions start at age 73.
• Loans may be available up to $50,000 or half the plan balance.
• Starting in 2024, up to $1,000 annually can be withdrawn penalty-free for emergencies.

Investment Options in 403(b) Plans

Investment choices are generally limited to annuity contracts or mutual funds within custodial accounts. Most plans now offer mutual funds inside variable annuity contracts, though options remain narrower than other plans.

Additional Considerations for 403(b) Plans

403(b) contributions are typically immediately vested, but employers may apply vesting retroactively. These plans enjoy creditor protection under federal bankruptcy law. Participants should review all plan fees, which must be transparently disclosed.

Should You Contribute to Both 403(b) and 457(b)?

You can contribute to both plans, but total contributions must comply with IRS limits. Consulting a financial advisor can help optimize your retirement strategy.

Comparing 401(k), 403(b), and 457(b) Plans

The primary distinction is the employer type: 401(k)s are offered by private employers, while 403(b) and 457(b) plans are common in public and nonprofit sectors.

Final Thoughts

If you want to maximize your retirement savings and have flexibility near retirement, a 457(b) plan may be advantageous. Although 403(b) plans offer fewer investment choices, combining contributions across both plans can let you save up to $46,000 in 2024 ($47,000 in 2025), excluding catch-up amounts.

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