What Is the Difference Between 457b and 403b?

For employees in the public sector and non-profit organizations, two common options are the 403(b) and 457(b) plans. These plans offer tax advantages designed to encourage long-term savings, allowing contributions to grow without immediate taxation. Understanding the distinct features of each plan is important for those navigating their retirement planning choices.

Understanding 403(b) Plans

A 403(b) plan operates as a tax-sheltered annuity or custodial account, specifically designed for employees of public schools and certain 501(c)(3) tax-exempt organizations. Participants contribute a portion of their salary to these plans through pre-tax deductions, reducing current taxable income. Employers may also contribute on their behalf.

Funds within a 403(b) plan grow on a tax-deferred basis, meaning investment earnings are not taxed until they are withdrawn in retirement. The investments typically available in a 403(b) include annuity contracts and mutual funds. For 2025, the standard employee contribution limit for a 403(b) plan is $23,500.

Withdrawals from a traditional 403(b) plan are taxed as ordinary income in retirement. If distributions are taken before age 59 1/2, they are generally subject to a 10% early withdrawal penalty.

Understanding 457(b) Plans

A 457(b) plan is a type of deferred compensation plan primarily offered by state and local government entities, as well as some non-governmental tax-exempt organizations. Employees can contribute to a 457(b) through pre-tax payroll deductions, which lowers their current taxable income. The contributions and any investment earnings within the plan grow tax-deferred until funds are withdrawn, typically during retirement.

Investment options can vary by plan, but 457(b) plans often provide a range of choices, including mutual funds and annuities. For 2025, the standard employee contribution limit for a 457(b) plan is $23,500, aligning with the 403(b) limit. Some governmental 457(b) plans may also offer a Roth contribution program, allowing for after-tax contributions that can lead to tax-free withdrawals in retirement, provided certain conditions are met.

A distinct feature of governmental 457(b) plans concerns withdrawals. Distributions from a governmental 457(b) plan are generally not subject to the 10% early withdrawal penalty upon separation from service, regardless of the participant’s age. These withdrawals are still subject to ordinary income tax.

Comparing Key Plan Features

The primary distinctions between 403(b) and 457(b) plans lie in their sponsoring employers, contribution aggregation rules, and withdrawal flexibility. Both plans serve as valuable retirement savings vehicles for employees in public service and non-profit sectors, but their specific provisions cater to different circumstances.

Eligibility

Eligibility for these plans depends on the employer’s tax status. Generally, 403(b) plans are available to employees of public schools and 501(c)(3) tax-exempt organizations. In contrast, 457(b) plans are typically offered by state and local government entities, and a limited number of non-governmental tax-exempt organizations.

Contribution Limits

Both 403(b) and 457(b) plans share the same standard elective deferral limit, which is $23,500 for 2025. Both also allow an additional age 50 or older catch-up contribution of $7,500 in 2025, bringing the total to $31,000 for eligible participants. Furthermore, for 2025, individuals aged 60 to 63 may be eligible for an increased catch-up contribution of $11,250 under SECURE 2.0 provisions, if their plan allows.

Beyond these standard and age-based catch-ups, each plan has unique provisions. For 403(b) plans, a “15-year rule” catch-up may allow long-serving employees to contribute an additional $3,000 per year, up to a $15,000 lifetime limit. For 457(b) plans, a “special 3-year pre-retirement catch-up” allows participants in governmental plans to contribute up to double the standard annual limit in the three years immediately preceding their stated normal retirement age.

Contribution Aggregation

A significant difference in how contributions are aggregated with other retirement plans exists. Contributions to a 403(b) plan are generally combined with contributions to 401(k) plans and certain IRAs when determining if an individual has reached their overall elective deferral limit. However, contributions made to a governmental 457(b) plan typically do not offset, or are not aggregated with, the limits for 401(k) or 403(b) plans. This non-aggregation feature means an individual could potentially contribute the maximum to both a 403(b) and a governmental 457(b) plan in the same year, effectively doubling their pre-tax savings capacity.

Withdrawal Rules

Withdrawal rules represent another key distinction. While both plans require distributions to be taxed as ordinary income, the 10% early withdrawal penalty for distributions before age 59 1/2 applies to 403(b) plans, similar to 401(k)s. In contrast, governmental 457(b) plans generally do not impose this 10% penalty if the participant separates from service, regardless of their age at withdrawal.

Investment Options and Employer Contributions

Regarding investment options, 403(b) plans have historically been associated with annuities, though mutual funds are now widely available. 457(b) plans often offer a broader array of investment choices, including various mutual funds. Employer matching contributions, while not universal, can be offered by employers for both 403(b) and 457(b) plans, varying based on the specific plan and employer policy. These employer contributions count towards the overall annual contribution limits for each plan.