Comparison & Contrast of 401(k), 403(b) and 457(b)
Employer-sponsored retirement plans are an alphabet soup of Internal Revenue Code citations. While many employees are familiar with 401(k) plans, 403(b) and 457(b) plans are similar in purpose and widely available. Due to the nature of the plans, most are not offered by the same employers. However, if you're in a position where you have to choose just one, you should be familiar with the features and benefits of each type of plan.
A 401(k) plan is an employer-sponsored plan offered by certain corporations. Typically, larger companies are more likely to provide a 401(k) for employees, as the costs can be significant. A 403(b) plan is a tax-deferred retirement plan also known as a tax-sheltered annuity. It's offered by certain public schools, tax-exempt organizations and church groups, rather than businesses. State and local governments, along with certain tax-exempt, non-governmental entities may offer a 457(b), which is a deferred compensation plan.
To contribute to a 401(k), 403(b) or 457(b), you'll indicate the percentage of your income you want to put into the plan. Your employer will withhold that amount from your paycheck and make the deposit on your behalf. For 2013, the contribution limit for eligible employees is $17,500 for all three plans. Once you reach age 50, you're allowed to make an additional "catch-up" contribution of $5,500 per year. The rules for a 457(b) plan get more complex if you're within three years of retirement, but generally you can defer an additional contribution up to the annual limit, or $17,500 as of 2013. Some 401(k) and 403(b) plans may allow employers to make additional contributions on behalf of their employees, whereas they cannot in 457(b) plans.
Designated Roth Accounts
If you don't want or need a tax deduction on your contributions, you can set up a designated Roth account within your 401(k), 403(b) or 457(b). A designated Roth account is funded with after-tax dollars, thereby precluding any tax deduction. However, when you take Roth money out of your plan, it will generally be tax-free. To qualify for tax-free status, you'll have to take money out after you reach age 59 1/2 and after having had the account for at least five years. You can also qualify if you become disabled, and your heirs can withdraw the money tax-free if you pass away.
Withdrawals from all of these retirement plans are restricted to some degree. With 401(k) and 403(b) plans, you can't take money out until you stop working and reach age 59 1/2, although you can take withdrawals if you leave your employer. Any money you take out before age 59 1/2 will trigger a 10 percent penalty tax. With 457(b) plans, there are no age restrictions. You can take money out whenever you stop working, even if you're under age 59 1/2, and you'll never face a 10 percent early withdrawal penalty. With the exception of designated Roth accounts, or the very rare occasion of non-deductible contributions, all money you take out of 401(k), 403(b) or 457(b) plans is taxable as ordinary income.
- Internal Revenue Service: Topic 424 -- 401(k) Plans
- Internal Revenue Service: IRC 457(b) Deferred Compensation Plans
- Internal Revenue Service: Publication 571 -- 403(b) Plan Basics
- Society for Human Resource Management: For 2013, IRS Raises 401(k) and Pension Plan Limits
- Forbes: The 4-1-1 on 457 Plans
- Internal Revenue Service: Retirement Plans FAQs on Designated Roth Accounts
John Csiszar has written thousands of articles on financial services based on his extensive experience in the industry. Csiszar earned a Certified Financial Planner designation and served for 18 years as an investment counselor before becoming a writing and editing contractor for various private clients. In addition to his online work, he has published five educational books for young adults.