403(b) and 457 Plans
403(b) and 457 Plans
403(b) and 457 plans are employer-sponsored retirement accounts for teachers, healthcare workers, non-profits, and government employees. 403(b)s mirror 401(k)s but with different investment options (often annuities). 457 plans are unique: contributions are not pre-tax at the federal level, but withdrawals at separation from employment are penalty-free regardless of age.
Key takeaways
- 403(b) plans are available to teachers, healthcare, and non-profit employees; they mirror 401(k) structures but often offer limited, high-fee annuity options.
- 457 plans exist in two types: governmental (for public employees) and non-governmental (for non-profit and private-entity employees).
- Governmental 457 withdrawals at separation of service are penalty-free at any age; this is a unique and powerful advantage.
- Both plans allow catch-up contributions for employees age 50+; governmental 457s also allow an additional "final three years" catch-up.
- Contribution limits are $23,500 annually (2024) for both 403(b) and 457, with similar catch-up amounts as 401(k)s.
403(b) plans: for teachers and non-profits
A 403(b) plan (also called a Tax-Sheltered Annuity or TSA) is available to employees of public schools, colleges, universities, non-profit organizations, and qualifying religious institutions. The mechanics are nearly identical to a 401(k): contributions are pre-tax, reduce your current taxable income, and grow tax-deferred.
The primary difference is in investment options. A traditional 401(k) offers a variety of mutual funds chosen by the plan administrator. A 403(b), by contrast, historically offered annuity contracts as the core investment vehicle. Annuities are insurance products that guarantee a fixed return or provide income guarantees. While annuities have a place in retirement planning, they often carry high fees (1%–2% annually) that erode returns significantly over time.
For example, a teacher investing $15,000 annually for 30 years in a 403(b) annuity with a 1.5% annual fee might accumulate $600,000. The same $15,000 invested in a low-cost index fund (0.05% fee) at 7% annual growth would accumulate $900,000. The $300,000 difference is not from investment performance; it is the drag from high fees compounded over 30 years.
In recent years, some 403(b) plans have added mutual fund and brokerage windows that allow self-directed investing outside annuities. If your employer's 403(b) offers this option, take it. If your 403(b) forces you into high-fee annuities, prioritize maximizing other account types first (IRAs, HSAs) and use the 403(b) only after other tax-advantaged accounts are saturated.
Many 403(b) participants are unaware they are in high-fee structures and never question the default options. A school district employee earning $65,000, contributing $10,000 annually for 30 years in a 1.5% fee annuity, will sacrifice $250,000+ in returns to fees. This is a form of financial negligence; scrutinizing your plan's investment options is non-negotiable.
457 plans: the unrestricted withdrawal advantage
A 457 plan is an employer-sponsored deferred compensation plan for certain government and non-profit employees. The key distinction from 403(b) and 401(k) is the withdrawal rule: you can withdraw from a governmental 457 at any age without penalty upon separation from service.
This is genuinely powerful and unique. A government employee (state, local, or municipal) age 45 who leaves their job can withdraw their 457 balance penalty-free. A private-sector worker age 45 who leaves a job cannot touch their 401(k) or 403(b) until 59.5 without a 10% penalty. The 457 rule creates a special opportunity for early retirement planning.
Example: A city employee age 55 with a $500,000 governmental 457 balance retires. She withdraws the $500,000 penalty-free and lives on it for four years until her age-59.5 arrival. At 59.5, she can access her IRAs and 401(k) if any remain. This sequential withdrawal strategy is only possible with 457 plans.
There are two types of 457 plans: governmental and non-governmental. Governmental 457s are offered by federal, state, and local government employers. Non-governmental 457s are offered by some non-profits and private entities. The unrestricted withdrawal rule applies to governmental 457s; non-governmental 457s have stricter withdrawal rules (similar to 401(k)s) and are less commonly used.
Contribution limits for 457 plans are $23,500 annually (2024), the same as 401(k) and 403(b). However, 457s allow a unique catch-up: in the three years before retirement, you can contribute double the annual limit (up to $47,000) if you did not max out previous years. This "final three-year catch-up" is exclusive to 457 plans and can be combined with the standard age-50 catch-up. A 57-year-old in a governmental 457 can potentially contribute $55,000+ ($23,500 standard + $7,500 age-50 catch-up + $24,000 final-three-year catch-up) in the final year before retirement if permitted by the plan.
Account structure and investment restrictions
Both 403(b) and 457 plans are typically administered by employers, who choose the investment menu and plan administrator. This gives you less control over investment options compared to a self-directed IRA. Many 403(b) plans offer only a handful of mutual funds, and some force annuities.
However, if your 403(b) or 457 offers a self-directed brokerage window, you can treat it like a 401(k): choose individual stocks, ETFs, and funds with minimal fees. Always ask your HR department whether this option exists. If not, advocate for it. Employer plans with poor investment options are a form of financial impoverishment for employees.
For those with excellent 457 plans (low-cost index fund options), a governmental 457 is highly valuable for early retirement planning. Contribute aggressively, especially in the final three years of employment, and plan sequential withdrawals to bridge the gap until age 59.5.
Interaction with other plans
If you are a teacher or government employee with both a 403(b) or 457 and an IRA, remember that contribution limits are separate. You can max out a 403(b) ($23,500 in 2024) and still contribute to a Roth or Traditional IRA ($7,000 in 2024) in the same year. This is different from individuals with 401(k)s, where the contribution limit sometimes interacts with other plans.
Additionally, the deduction limit for Traditional IRA contributions if you have a 403(b) or 457 is based on Modified Adjusted Gross Income (MAGI) and follows the same phase-out rules as traditional 401(k) employees. If you earn above the phase-out threshold and have a 403(b) or 457, you cannot deduct Traditional IRA contributions; but you can execute a backdoor Roth just like high-income 401(k) participants.
Decision framework
Next
While 403(b) and 457 plans serve specific employer groups, the next question for all employees is the Roth version of their plan. Can you contribute Roth to a 401(k), 403(b), or 457? And how does a Roth 401(k) differ from the Traditional version?