What Is the Difference Between 403(b) and 457(b) Plans?

Retirement savings plans serve as important tools for individuals to build financial security for their future. Among the various options available, 403(b) and 457(b) plans stand out as tax-advantaged retirement vehicles primarily offered to employees of specific types of organizations. These plans are designed to encourage long-term savings by allowing contributions to grow with tax benefits. Understanding the distinct characteristics of these plans is important for those considering their retirement savings options.

Eligibility and Plan Sponsorship

The types of employers authorized to sponsor 403(b) and 457(b) plans represent a fundamental distinction. A 403(b) plan, often referred to as a tax-sheltered annuity, is available to public education organizations, such as public schools, and certain tax-exempt organizations. This includes entities operating under Internal Revenue Code Section 501(c)(3), which covers non-profit organizations like hospitals, charities, and religious institutions. Employees of these eligible organizations can participate in a 403(b) plan offered by their employer.

Conversely, 457(b) plans are offered by state and local governments, as well as certain tax-exempt organizations. It is important to differentiate between governmental 457(b) plans and non-governmental 457(b) plans. Governmental 457(b) plans are specifically for employees of state and local government entities, including municipal employees, police officers, firefighters, and public school teachers. Non-governmental 457(b) plans are available to employees of certain tax-exempt organizations, which may include some of the same types of 501(c)(3) organizations that can also offer 403(b) plans.

This overlap means some tax-exempt organizations may have the option to offer both a 403(b) and a non-governmental 457(b) plan to their employees. While the sponsoring organization might be the same, the specific rules governing each plan type remain distinct. Eligibility for an employee to participate hinges directly on their employer’s classification and whether that employer chooses to offer the respective plan. Generally, if an employer offers a 403(b) plan, they must extend the opportunity to all employees to make elective deferrals, subject to limited exclusions for certain employee groups.

For 457(b) plans, eligibility typically extends to common law employees of the sponsoring governmental or tax-exempt entity. This structure ensures that individuals working for public service or qualifying non-profit entities have access to these specific deferred compensation arrangements.

Contribution Rules and Limits

Understanding the contribution rules and limits for 403(b) and 457(b) plans is important for maximizing retirement savings. Both plan types allow employees to make elective deferrals, meaning they contribute a portion of their salary before taxes are calculated, which can reduce current taxable income. For 2025, the standard annual elective deferral limit for both 403(b) and 457(b) plans is $23,500. This limit applies to the combined amount an individual contributes across all 403(b) or 457(b) plans they may participate in, if applicable.

A notable feature is that the Internal Revenue Service (IRS) treats the contribution limits for 457(b) plans separately from those for 403(b) plans. This distinct treatment means that an eligible employee could potentially contribute the maximum amount to both a 403(b) plan and a 457(b) plan in the same year, effectively allowing for a higher total deferred amount for retirement savings. For instance, an individual working for an organization that offers both plans could contribute $23,500 to a 403(b) and an additional $23,500 to a 457(b) in 2025.

Beyond the standard elective deferral limits, both plan types offer specific catch-up contribution provisions for certain participants. For 403(b) plans, individuals aged 50 or older by the end of the calendar year are generally permitted to make an additional “age 50” catch-up contribution. In 2025, this catch-up contribution allows participants aged 50 or over to contribute an additional $7,500, raising their total potential contribution for the year to $31,000. Some 403(b) plans may also permit a special 15-year service catch-up contribution, allowing an additional $3,000 per year for up to five years, with a lifetime maximum of $15,000, although this provision is less common and complex to apply.

Governmental 457(b) plans feature a unique “special catch-up” provision, often referred to as the “3-year rule” or “pre-retirement catch-up”. This rule allows participants who are within three years of their plan’s normal retirement age to contribute up to double the standard annual limit, provided they have not previously deferred the maximum amount in prior years. For 2025, this could allow contributions of up to $47,000 in a single year ($23,500 standard limit multiplied by two). However, this special catch-up is generally not available in non-governmental 457(b) plans, which typically only permit the age 50 catch-up if they offer it at all. Employer contributions, such as matching contributions or discretionary contributions, may also be made to both 403(b) and 457(b) plans, further increasing an individual’s retirement savings.

Withdrawal and Distribution Rules

The rules governing withdrawals and distributions from 403(b) and 457(b) plans present important differences, particularly concerning early withdrawal penalties. For 403(b) plans, distributions taken before age 59½ are generally subject to a 10% additional tax, commonly known as an early withdrawal penalty. This penalty applies unless a specific exception is met, such as distributions made due to death, disability, or qualified higher education expenses. The primary goal of this penalty is to discourage early access to retirement funds, ensuring they are preserved for their intended purpose.

In contrast, governmental 457(b) plans offer a notable advantage regarding early withdrawals. Distributions from governmental 457(b) plans are generally not subject to the 10% early withdrawal penalty, even if taken before age 59½, provided a distributable event has occurred. A distributable event typically includes separation from service, death, or unforeseeable emergency. This provision provides governmental 457(b) participants with greater flexibility in accessing their funds without penalty if they leave their employment before traditional retirement age.

Both 403(b) and 457(b) plans are subject to Required Minimum Distribution (RMD) rules, which dictate when participants must begin taking withdrawals from their accounts. Generally, RMDs must begin by April 1 of the year following the year in which the participant reaches age 73, or upon retirement, whichever is later. These rules ensure that tax-deferred savings are eventually distributed and taxed. The calculation for RMDs is based on the account balance at the end of the previous year and the participant’s life expectancy, as determined by IRS tables.

Distributions upon separation from service also differ between the plans. For 403(b) plans, funds can typically be distributed once an employee separates from service, but the 10% early withdrawal penalty still applies if the individual is under age 59½. However, for governmental 457(b) plans, funds become available for distribution upon separation from service, and these distributions are not subject to the 10% early withdrawal penalty, regardless of the participant’s age. This distinction in early withdrawal penalty application is a key factor when comparing the liquidity and accessibility of funds in these two types of retirement plans.

Additional Plan Features

Beyond eligibility, contributions, and distributions, 403(b) and 457(b) plans have other features that differentiate them, particularly concerning plan loans and creditor protection. Plan loans are a common feature in many retirement plans, allowing participants to borrow against their vested account balance. Generally, 403(b) plans typically permit plan loans, providing participants with a source of funds for various needs without incurring a taxable distribution or early withdrawal penalty, provided the loan terms are followed. The amount that can be borrowed is usually limited to the lesser of $50,000 or 50% of the participant’s vested account balance.

The availability of plan loans in 457(b) plans varies significantly based on whether the plan is governmental or non-governmental. Governmental 457(b) plans may or may not permit loans, depending on the specific plan’s design. Non-governmental 457(b) plans, however, generally do not permit loans because the plan assets remain the property of the employer until distributed to the participant. This fundamental difference means that participants in non-governmental 457(b) plans typically cannot access their savings through a loan feature.

Creditor protection also varies between the two plan types and within 457(b) plans themselves. 403(b) plans are generally subject to the Employee Retirement Income Security Act of 1974 (ERISA), which provides strong creditor protection for the assets held within the plan. This means that in most cases, funds in a 403(b) plan are protected from creditors’ claims, providing a layer of security for retirement savings. Governmental 457(b) plans also offer robust creditor protection, often through state laws that mirror ERISA’s protections for public employees.

In contrast, non-governmental 457(b) plans generally offer weaker or no creditor protection. Since the assets in non-governmental 457(b) plans are considered to be the property of the employer until distributed, they may be subject to the employer’s creditors in the event of bankruptcy or financial distress. This lack of ERISA protection for non-governmental 457(b) plans represents a significant risk difference compared to 403(b) and governmental 457(b) plans. Both plan types generally allow for rollovers of funds into other qualified retirement plans, such as 401(k)s, or Individual Retirement Accounts (IRAs), upon separation from service or other triggering events, providing flexibility for managing retirement savings across different accounts.