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

Employer-sponsored retirement plans are crucial for building financial security. These plans offer advantageous tax treatment, encouraging long-term savings that can grow substantially over time. Among workplace retirement vehicles, 403(b) and 457(b) plans are designed for employees in specific sectors. Understanding their characteristics is important for maximizing retirement savings.

Plan Eligibility and Basic Characteristics

403(b) and 457(b) plans are distinguished by the type of employer offering them. A 403(b) plan is a tax-deferred retirement savings account available to employees of public schools, colleges, universities, and certain 501(c)(3) tax-exempt organizations like hospitals, charities, and churches. These plans allow pre-tax contributions and tax-deferred growth, with investments often including annuities and mutual funds.

In contrast, 457(b) plans are offered by state and local government entities, including public school systems, and some non-governmental tax-exempt organizations. Governmental 457(b) plans operate as deferred compensation arrangements, enabling employees to defer a portion of their income on a tax-deferred basis. Non-governmental 457(b) plans are limited to a select group of management or highly compensated employees within tax-exempt entities. Both plan types allow contributions and earnings to grow tax-deferred until withdrawal, when they are taxed as ordinary income.

Contribution Rules

The IRS sets annual contribution limits. For 2025, the standard elective deferral limit for employee contributions to both 403(b) and 457(b) plans is $23,500. Employers can also make contributions, such as matching funds, increasing an employee’s total retirement savings. The total contribution limit, combining employee and employer contributions, for a 403(b) plan is $70,000 for 2025, or $77,500 for those age 50 or older.

Both 403(b) and governmental 457(b) plans offer age-based catch-up contributions for individuals aged 50 or older, allowing an additional $7,500 in 2025, bringing the total elective deferral limit to $31,000. 403(b) plans may permit a special 15-year service catch-up for employees with at least 15 years of service with the same employer. This allows an additional $3,000 per year, up to a lifetime maximum of $15,000, if certain conditions are met. For 457(b) plans, a unique pre-retirement catch-up provision allows participants within three years of their plan’s normal retirement age to contribute up to twice the regular annual limit. This special 457(b) catch-up cannot be combined with the age 50 catch-up in the same year.

A new provision from the SECURE 2.0 Act of 2022, effective January 1, 2025, allows participants aged 60, 61, 62, or 63 to make an additional catch-up contribution of up to $11,250 to 401(k), 403(b), and 457(b) plans, if the plan adopts it. This replaces the standard age 50+ catch-up for those specific ages. Individuals working for employers offering both plan types can contribute the full annual limit to each plan, potentially doubling their tax-deferred savings.

Distribution Rules

Accessing funds from 403(b) and 457(b) plans involves distinct rules regarding timing and penalties. For 403(b) plans, withdrawals before age 59½ are generally subject to a 10% early withdrawal penalty, in addition to ordinary income tax. Exceptions exist for circumstances such as separation from service at age 55 or older, total and permanent disability, or certain medical expenses.

Governmental 457(b) plans have a notable difference: funds are not subject to the 10% early withdrawal penalty if taken after separation from service, regardless of age. This flexibility benefits individuals retiring before age 59½. Non-governmental 457(b) plans may have different rules regarding early access and taxation upon distribution.

Both 403(b) and 457(b) plans are subject to Required Minimum Distribution (RMD) rules, mandating withdrawals once participants reach age 73. Many plans also offer loan provisions, allowing participants to borrow against their vested account balance. The IRS limits such loans to the lesser of $50,000 or 50% of the vested account balance, with repayment typically required within five years, or potentially longer if the loan is used for a primary residence.

Upon leaving an employer or at retirement, funds from both 403(b) and governmental 457(b) plans can be rolled over into other qualified retirement accounts, such as an IRA, a 401(k), or another eligible 403(b) or 457(b) plan. Non-governmental 457(b) plans have more limited rollover options.

Key Distinctions

Beyond eligibility and contribution/distribution mechanics, 403(b) and 457(b) plans have other distinctions, particularly concerning regulatory oversight and asset protection. Many 403(b) plans are subject to the Employee Retirement Income Security Act (ERISA), which provides participant protections. Governmental 457(b) plans are not subject to ERISA regulations. Non-governmental 457(b) plans are also exempt from ERISA’s funding requirements, but must be limited to a select group of management or highly compensated employees.

The treatment of plan assets in the event of an employer’s financial distress also differs. For governmental 457(b) plans, contributions are held in a trust, protecting them from the employer’s creditors. In non-governmental 457(b) plans, assets remain the property of the employer, meaning they are available to the employer’s general creditors in the event of litigation or bankruptcy. While these plans often use “rabbi trusts,” the assets within such trusts are still subject to creditor claims.

Individuals eligible for both a 403(b) and a 457(b) plan can contribute to both simultaneously. Since these plans have separate contribution limits, this allows for a higher total annual deferral. This strategy can substantially accelerate retirement savings. Investment options are chosen by the employer and can include annuities and mutual funds. 403(b) plans often have a higher prevalence of annuity products, while 457(b) plan selection varies.