What are the Differences Between a 401k, 403b, and 457b?

We’ve recently covered several different types of retirement accounts. Today, we’d like to compare & contrast three of these (401k, 403b, and 457b). These plans are all employer-sponsored retirement savings vehicles, but they are often associated with different types of employers and have some distinct features. Let's dive into each one:

1. 401(k) Plan:

   1. Employer Type: Typically offered by for-profit private sector companies.

   2. Eligibility: Available to eligible employees of the company.

   3. Contributions: Employees can contribute a portion of their pre-tax salary to the plan, up to annual limits set by the IRS. Some employers also offer a Roth 401(k) option, where contributions are made with after-tax dollars.

   4. Employer Contributions: Employers can choose to match a portion of employee contributions, providing an additional benefit.

   5. Investment Options: Participants can typically choose from a range of investment options, such as mutual funds or exchange-traded funds (ETFs).

   6. Withdrawals: Withdrawals before age 59½ may incur penalties unless qualifying conditions are met. Required Minimum Distributions (RMDs) typically start at age 72.

2. 403(b) Plan:

   1. Employer Type: Commonly offered by nonprofit organizations, schools, and certain healthcare organizations.

   2. Eligibility: Available to employees of eligible nonprofit institutions, as well as public education employees.

   3. Contributions: Similar to a 401(k), employees can contribute a portion of their pre-tax salary. Some plans also offer a Roth 403(b) option.

   4. Employer Contributions: Employer matches or contributions can be a feature of 403(b) plans.

   5. Investment Options: Investment choices may include annuities, mutual funds, and sometimes, target-date funds.

   6. Withdrawals: Early withdrawals before age 59½ may incur penalties. RMDs typically start at age 72, or 70½ if born before July 1, 1949.

3. 457(b) Plan:

   1. Employer Type: Primarily offered by state and local governments and some tax-exempt organizations.

   2. Eligibility: Generally available to state and local government employees and certain nonprofit employees.

   3. Contributions: Employees can contribute a portion of their pre-tax salary. Some plans also offer a Roth 457(b) option.

   4. Employer Contributions: Employer contributions are possible but less common than in 401(k) or 403(b) plans.

   5. Investment Options: Investment choices can vary, but they often include mutual funds.

   6. Withdrawals: 457(b) plans have some unique withdrawal flexibility. Early withdrawals before age 59½ may not incur penalties in certain situations. RMDs typically start at age 72.

It's important to note that contribution limits, catch-up provisions for older participants, and other plan details can change over time and may vary based on individual circumstances and specific plan designs. Consulting with a financial advisor or your employer's HR department can provide more precise information tailored to your situation. Additionally, carefully consider your investment choices within these plans to align with your retirement goals and risk tolerance.

*Not financial/legal advice