What is the main difference between a 457 plan and 403(b) plan, and
how much can I contribute to both?
457 plans and 403(b) plans
are quite similar. However, there are a few important differences.
If
you take money out of your 403(b) plan before you reach age 59 1/2 and
are still working, or you leave your job but are not yet age 55, you may
have to pay an extra 10% penalty on top of the ordinary income taxes
that will be due on the distribution.
In addition, 457 plan
participants may be able to invest in a wide variety of vehicles, but
403(b) plan participants are limited to annuities and mutual funds.
There
is no 10% penalty for early distributions from a 457 plan. However, you
generally cannot take in-service distributions unless you have an
unforeseen emergency.
The other main difference between 457
plans and 403(b) plans is how they are held. 403(b) contracts are held
by you, the employee, either in an annuity or a custodial account if you
invest in mutual funds. The assets in a 457 plan are held in a contract
by the employer. However, these funds are protected from the district's
creditors by law.
If you have a 403(b) and 457 plan, you can
make a full contribution up to the limit for each, provided the amount
you contribute is less than your total compensation for the year. In
2010, that is $16,500, or $22,000 if you are age 50 or older, for each
account, or a total of up to $33,000 ($44,000 for age 50+).
In
addition, eligible employees in 403(b) plans with 15 or more years of
full-time service may be able to contribute a catch-up amount up to
$3,000 more for five years, or a maximum of $15,000.
Eligible
employees in 457 plans may be eligible to defer up to two times the
contribution limit in effect for the final three years of service.
However, employees cannot participate in the 3-year catch-up and the 457
plan age 50+ catch-up during the same tax year.
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