The Advisor - May 2012


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Which Is Better – a 403(b) or a 457 Plan?

Your district may offer both a 403(b) and a 457 plan. The plans are very similar in many ways:

  • Both offer tax advantages.
  • Both have the same annual contribution limits.
  • Both offer similar investment options. 403(b) plans offer mutual funds through 403(b)(7) custodial accounts, fixed annuities, equity indexed annuities and variable annuities. 457 plans generally offer similar investments, but also may include other options, such as collective trust funds and commingled funds. It’s important to compare the investment options available in each plan, along with the plan fees and expenses. To find more information about fees and expenses for 403(b) plans, go to This site allows you to review the information available from different vendors. For 457 plans, you will need to request information from your district. Ask for a list of fees and expenses for the various investments available.
  • Both can be rolled over into another 403(b), 457 plan or 401(k), if rollovers are accepted by the new plan, so that you can continue your tax-deferred savings if you transfer to another district or take another job. You also have the option of rolling the balance into a rollover individual retirement account (IRA) if you leave your job.
  • Both may allow you to take a loan from your account, but this option depends on your district’s plan.
The differences?

There are a few minor differences between 403(b) and 457 plans, including the way the assets are held, but the main differences are these:

  • Distributions from a 403(b) plan while still employed (called inservice distributions) are allowed only on hardship if you are under age 59½. But your plan may allow you the flexibility of taking inservice distributions without penalty once you are age 59½. And, you can take distributions without penalty if you are at least age 55 when you leave service.
  • Distributions from a 457 plan are not allowed while you are still employed except in the case of an unforeseeable emergency. According to the IRS, unforeseeable emergencies might include imminent foreclosure on, or eviction from, your home; major medical expenses; and funeral expenses.
  • There is no tax penalty imposed on 457 plans. So you can leave your job at any age and take the money out without penalty.
  • With a 403(b) plan, you may face a 10% federal tax penalty if you take a nonqualified distribution. So, for example, if you leave your job, are not at least age 55 and you take money out of the plan, you will probably owe a 10% federal tax penalty and a state tax penalty as well. This penalty also applies if you take out a loan and can’t pay it back.

So, choosing which plan is better for you will depend on a number of factors. If you expect to work beyond age 59½ and would like the flexibility of taking in-service distributions, the 403(b) plan may seem more attractive. If you prefer the ability to take the money out without penalty if you leave your job before you turn age 55, the 457 plan may be a better option. But these are not the only considerations. You should also compare the product offerings and vendors available in each plan to see if the investments offered by one are more suitable for you than those offered by the other.

What about Taking Out the Money?

You will pay ordinary income taxes on your withdrawals once you retire, but it may be that you will have had many years of tax-deferred growth in the meantime. In addition, you may be in a lower tax bracket once you retire and are no longer earning a steady paycheck.

It’s important to understand that if you take premature withdrawals from a 403(b) plan, you may have to pay a 10% federal tax penalty in addition to income tax (California taxes and penalties may apply as well). There is no penalty (although ordinary income taxes will apply) on premature withdrawals from a 457 plan, but you cannot take withdrawals unless you retire, leave employment or have an unforeseeable emergency.

Note that different rules apply to Roth 403(b) and Roth 457 plans (see comparison chart). Contributions are made on an after-tax basis, but they offer the potential for tax-free distributions in retirement. Learn more about Roth 403(b) and Roth 457 plans at