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

457 and 403(b) plans are common retirement savings options for employees in specific sectors. Both plans help individuals accumulate wealth through tax-advantaged savings. However, their rules regarding contributions, withdrawals, and other features differ. This article clarifies the key distinctions between 457 and 403(b) retirement plans.

Understanding Each Plan

A 457 plan is a non-qualified, deferred compensation plan primarily for state and local government employees and some tax-exempt organizations. Participants contribute a portion of their salary before taxes, and these contributions grow tax-deferred until retirement. This plan allows public sector employees, such as teachers, police officers, and firefighters, to save for retirement.

A 403(b) plan, also known as a tax-sheltered annuity (TSA), is a retirement plan for employees of public schools, colleges, universities, hospitals, and certain non-profit organizations under Section 501(c)(3). Contributions are pre-tax through payroll deductions, reducing current taxable income. Investments grow tax-deferred, with taxes paid only upon distribution in retirement.

Contribution Rules

For 2025, the standard elective deferral limit for both 457(b) and 403(b) plans is $23,500.

Both plan types offer catch-up contributions for older workers. For 2025, individuals aged 50 or older can contribute an additional $7,500 to their 403(b) plan, totaling $31,000. Governmental 457(b) plans also allow this $7,500 age-50 catch-up contribution, for a total of $31,000. Non-governmental 457(b) plans do not offer the age-50 catch-up option.

A special 457 catch-up rule exists for governmental 457(b) plans. This allows participants to contribute more in the three years before their normal retirement age, up to double the standard annual limit ($47,000 for 2025) or the annual limit plus any underutilized contributions from prior years, whichever is less. A participant cannot use both the age-50 catch-up and this special pre-retirement catch-up in the same year.

For 403(b) plans, a 15-year rule may allow long-serving employees to contribute an extra $3,000 per year, up to a lifetime maximum of $15,000. This applies to employees with at least 15 years of service with the same eligible employer and is applied before the age-50 catch-up. Beginning in 2025, the SECURE 2.0 Act introduced a higher catch-up contribution for individuals aged 60-63, allowing an additional $11,250 for both 403(b) and governmental 457(b) plans, for a total possible contribution of $34,750.

Withdrawal and Distribution Rules

A distinction between these plans lies in the early withdrawal penalty. For governmental 457(b) plans, participants who separate from service can withdraw funds at any age without incurring the 10% early withdrawal penalty that applies to other retirement accounts before age 59½. These distributions are subject to ordinary income tax.

Withdrawals from a 403(b) plan before age 59½ are subject to a 10% additional penalty tax, unless an IRS exception applies. Exceptions for 403(b) plans include distributions due to disability, death, or separation from service at or after age 55.

Both 457(b) and 403(b) plans are subject to Required Minimum Distributions (RMDs). Participants must begin taking distributions from their accounts once they reach age 73. Failure to take the full RMD amount can result in a 25% penalty of the amount not withdrawn.

Plan loans may be available from both types of plans, allowing participants to borrow against their vested account balance. The maximum amount that can be borrowed is the lesser of 50% of the vested account balance or $50,000. Repayment periods are five years, though a longer term may be permitted for a loan used to purchase a primary residence. Non-governmental 457(b) plans do not offer loan provisions.

Hardship withdrawals are possible for both plan types, with differing criteria. For 403(b) plans, hardship distributions are permitted for an “immediate and heavy financial need,” such as certain medical expenses, costs to purchase a primary residence, tuition, or expenses to prevent eviction or foreclosure. These 403(b) withdrawals are subject to the 10% early withdrawal penalty if the participant is under age 59½. Governmental 457(b) plans allow distributions for an “unforeseeable emergency,” including severe financial hardship due to illness, accident, or property loss. These emergency withdrawals are not subject to the 10% early withdrawal penalty, but are taxed as ordinary income.

Other Key Distinctions

Investment Options

Investment options within 457(b) and 403(b) plans vary. 403(b) plans traditionally offered a limited selection, primarily annuity contracts and mutual funds. Modern 403(b) plans may offer broader choices but can still be more restrictive. Governmental 457(b) plans often provide a wider range of investment options, similar to 401(k) plans. For non-governmental 457(b) plans, the employer retains ownership of account assets, which limits participant control over investment decisions.

Creditor Protection

Governmental 457(b) plans offer strong creditor protection under federal and state laws. 403(b) plans receive protection under the Employee Retirement Income Security Act (ERISA) if applicable, or through state laws. Non-governmental 457(b) plans offer less creditor protection because assets remain the employer’s property until distributed. This means funds in a non-governmental 457(b) plan could be at risk if the employer faces bankruptcy or financial distress.

Rollover Flexibility

Funds from a governmental 457(b) plan can be rolled over into other qualified retirement plans, such as an Individual Retirement Account (IRA), a 401(k), a 403(b), or another 457(b) plan. Non-governmental 457(b) plans do not permit rollovers into other retirement accounts, as assets are not held in trust for the employee. 403(b) plans allow rollovers to IRAs, 401(k)s, or other 403(b)s, offering similar portability to governmental 457(b)s.

Employer Contributions

Employer contributions or matching contributions are not guaranteed for either plan type and depend on the specific plan design. Some employers sponsoring 403(b) plans may offer matching contributions. Governmental 457(b) plans may or may not include employer contributions. If employer contributions are made to a 457(b) plan, these amounts reduce the employee’s overall contribution limit for the year.