Saving for retirement is one of the most important financial decisions you can make. But because of many different plans available through employers, how’s a person supposed to know which one is best?
I’m here to help explain the differences between the three biggies – 401(k), 403(b), and 457 plans. Let’s start!
Who’s Eligible for Each Plan?
The first thing to know is that you can’t just sign up for any plan – your employer determines what’s available to you based on their business structure. Here’s a quick rundown:
401(k) Plans
These are offered by private companies – think corporations, small businesses, nonprofits, churches, etc. If you work at a private company, you’ll likely have access to a 401(k). It’s the most common employer plan.
403(b) Plans
These plans are for employees of public schools, tax-exempt nonprofits, churches, and some government organizations. If you work at a school, hospital, library, charity, or religious institution, you may be offered a 403(b).
457 Plans
These are specifically for people who work in state and local government roles, like police, firefighters, city council members, public works employees, etc. Certain nonprofit orgs can also offer 457’s.
So in a nutshell – private company? Check for a 401(k). Nonprofit or school? Look for a 403(b). State or city job? Ask about that 457!
Contribution Limits
Okay, what if you actually have access to one of these plans through work? How much money can you contribute each year? Here are the annual limits:
| Plan | Under Age 50 | Age 50+ |
|---|---|---|
| 401(k) | $23,000 | $30,500 |
| 403(b) | $23,000 | $30,500 |
| 457 | $23,000 | $30,500 |
Well isn’t that nice and tidy? The limits are the same for all three plan types if you’re under age 50. Once you hit 50, your limit gets bumped up by $7,500 for the year.
That “over 50 bonus” is called your catch-up contribution, and it’s handy if you got a late start on retirement saving. You can celebrate half a century by socking away extra funds!
Employer Contributions
Many employers that offer 401(k)s or 403(b)s also match employee contributions up to a certain percentage. So if you put in 5% of your paycheck, your company might kick in another 3% into your account.
It’s like your boss buying you extra fruit! Be sure to take full advantage of any available matching funds.
Now with 457 plans, it’s different – any employer contributions have to be kept separately from your funds and also count toward the yearly max. Lame, I know.
So if you put $20,000 in your 457, your boss can only add $3,000 more to their side fund. But with the 401(k) and 403(b), your employer’s money doesn’t apply to your limit.
Early Withdrawal Penalties
What if you need to crack open your retirement stash before the official retirement age? Will you get slapped with nasty penalties?
- 401(k): 10% penalty if you take money out before age 59 1/2.
- 403(b): Also a 10% penalty if you withdraw before 59 1/2.
- 457: No penalties! Take out money whenever you want.
I don’t know about you, but having the option to withdraw my 457 money without penalties would bring me great peace of mind. Now keep in mind you’ll still owe income taxes on early withdrawals from any of these accounts.
Roth Contribution Option
Roth accounts let you make contributions with after-tax dollars, which means tax-free growth and withdrawals later. It’s like buying fancy tropical fruit!
The good news is 401(k), 403(b), and 457 plans can all offer Roth options now. The one exception is 457s – they can only provide Roth accounts for government employees, not nonprofit workers. Lame again.
Overall though, the Roth door has opened widely for pre-tax retirement plans.
Key Differences at a Glance
| 401(k) | 403(b) | 457 | |
|---|---|---|---|
| Available at | Private companies | Nonprofits, schools, churches | State/local govt, some nonprofits |
| 2024 Price Limit | $23,000 (<50), $30,500 (50+) | $23,000 (<50), $30,500 (50+) | $23,000 (<50), $30,500 (50+) |
| Free Fruit from Boss? | Yes, unlimited | Yes, unlimited | Limited to total max |
| Early Withdrawal Penalty | 10% before 59 1/2 | 10% before 59 1/2 | No penalty |
| Exotic Roth Fruit? | Yes | Yes | Government only |
I hope this table crystallizes the major differences between the plans. Now let’s get you signed up for the right fruit stand!
Which Plan is Right for You?
Given what we just covered, here are a few tips for picking your ideal retirement plan:
- Enroll in your employer’s available plan – You’re limited by what they offer, so take advantage of the plan you have access to.
- Prioritize any match – If your employer matches a 401(k) or 403(b), don’t leave free money on the table.
- 457 for penalty-free access – If you may need funds pre-retirement, the 457 flexibility is useful.
- Weigh Roth options – All three plans can offer Roth contributions now, but the 457 has restrictions.
- Consider consolidating – You can roll over funds from old plans into your current one.
- Max out contributions – Contribute up to the annual IRS limit to build your nest egg.
The most important thing is to start saving now, no matter which option you have! If you’re unsure about which plan is right for you, contact one of our expert agents today at Teachers Retirement Solutions. We’re here to help guide you through the process and get you set up for a secure financial future. Don’t wait—start building your nest egg now!
