Which Is Better, a 457 or 403 B Retirement Plan?

Both 457(b) plans -- usually referred to simply as 457 plans -- and 403(b) plans are tax-advantaged retirement plans offered by certain types of employers. Since they share many similar characteristics, it can be hard to choose between the two, especially when an employer offers both. Which one is better for you depends on how you anticipate needing your money in the future.

Eligible Employees

Neither a 457 nor a 403(b) can be offered by a typical for-profit corporation, which would traditionally offer a 401(k) plan instead. Educational institutions and certain tax-exempt organizations can offer 403(b) plans, while 457 plans are offered by state and local governments. Although it is unusual, some institutions, such as the University of California, offer both types of plans. Typically, all employees of these types of employers are eligible to contribute to these plans.

Contributions

As of 2015, the employee contribution limits for both 403(b) and 457 plans was the lesser of 100 percent of an employee's compensation or $18,000. For both plans, employees age 50 or older can contribute an additional $6,000 "catch-up" contribution. For 403(b) plans, employers can make additional contributions to employee accounts, up to a combined employee-employer contribution limit of $53,000. The joint contribution limit for 457 plans remains at $18,000, so if you have a generous employer a 403(b) plan might make more sense for you.

For both types of accounts, you may be able to defer some of your salary into a Roth option. Like a Roth IRA, a Roth contribution to either a 403(b) or a 457 plan goes in after-tax, meaning you don't get a tax deduction for your contribution.

Withdrawals

Withdrawals from both plans come with restrictions. The IRS won't allow you to take money out of either type of plan unless you have a qualifying event, such as leaving your job, becoming disabled or turning age 59 1/2. Restrictions on 457 plans are a bit tougher, as you can't typically take a withdrawal while still employed unless you demonstrate an extreme financial hardship, even if you're over age 59 1/2.

As with other types of qualified retirement plans, such as 401(k) plans, withdrawals from both 403(b) and 457 plans are taxable as ordinary income. The exception to this rule is if you made any Roth contributions to your account, in which case both your contributions and your earnings come out tax-free.

The IRS typically levies a 10 percent early withdrawal penalty on retirement plan distributions made before 59 1/2, but this is not the case for 457 plans. The penalty does apply to 403(b) plan distributions, but many of the triggers for qualifying distributions, such as disability, financial hardship or being a qualified reservist, also act as exceptions to the 10 percent penalty.

No Clear Winner

When it comes to choosing a winner between 403(b) and 457 plans, there is no obvious choice. With similar eligibility and contribution limits, the key differentiating factor between these two types of plans may be when you need to access your money. According to the Human Resources Department at the University of Michigan, you may prefer a 403(b) plan if you intend to take money out before you stop working. If you don't foresee that need, the 457 plan may be a better option. Since many employers only offer one plan over the other, that choice may be made for you. If you are fortunate enough to have an option, the best overall savings strategy may be to max out both plans, if you have the disposable income.