How to Invest in a 457(b) or a 403(b)

Pretax retirement accounts offer tax advantages.

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A 457(b) is a pretax retirement savings account for employees of state or local governments or of tax-exempt nongovernmental organizations. It is the practical near-equivalent of a 401(k) for corporate employees. A 403(b) is the same but is offered to workers at public schools, hospitals and other nonprofit organizations. The Internal Revenue Service rules that apply to each of the three types of accounts are similar but not identical. To open and fund a 457(b) or 403(b) means making some choices.

Step 1

Look at your retirement landscape, financially speaking. Take into account other sources of income, such as an individual retirement account, pensions or stocks, bonds, mutual funds and cash you hold outside of retirement accounts. Visit an online retirement calculator to get an idea of how much you need to save to generate your desired retirement income.

Step 2

Add up your years to retirement. If you are in your 20s or 30s, with 40-plus working years ahead, you might want to invest for growth, which typically means putting more of your retirement plan money into stocks or mutual funds made up of stocks. If you are in your 40s or 50s and closer to retirement, preserving your money should become more of a priority, making bonds or bond funds, for example, a wiser choice.

Step 3

Look at target-date funds. These funds put reallocation on automatic pilot. As you age, the fund mix gradually shifts from equity to fixed-income orientation. You may not want to put all your 457(b) or 403(b) money in such a fund, but an investment is worth considering.

Step 4

Examine the fees. Some 403(b) plan investments in particular charge not only fees that exceed 2 percent per year but also surrender charges for cashing out of the plan before a certain number of years. If your plan offers only annuities as investment choices, you may be exposed to another type of fee called an M&E charge -- short for mortality and expense.

Step 5

Figure out how much you want deducted from your paycheck each pay period. If your employer offers a matching 403(b) contribution -- more likely if you work in postsecondary education -- put in at least enough to take advantage of the match. You can settle on a yearly amount and divide it by the number of paychecks you receive in a year. As of 2013, the IRS allows you to contribute $17,500 per year, or $23,000 if you are 50 or older.

Step 6

Get the account-opening paperwork from your human resources or payroll department. Fill out the account-opening form with your identifying information. Indicate your investment choices. Fill out the payroll deduction authorization form and specify your per-pay-period deduction amount. Sign, date and submit the forms to the human resources or payroll department.

Step 7

Check your pay stub to be sure the deductions are being taken out. Depending on payroll procedures, it may take two or three pay periods for the new deductions to be instituted. If you don't notice any changes after the third pay period, contact human resources or the payroll department for an explanation.