Workers have to deal with a lot of alphabet soup and references to numerical sections of the tax laws in saving for retirement. Although most of those who work for private employers have access to employer-sponsored 401(k) plans, those who work in other industries will see references to other types of accounts, including 403(b) and 457 plans. To help the average person understand what all these different numbers and letters mean, below you'll find some discussion about these 401(k) alternatives and the differences and similarities among them.
403(b) plans for tax-exempt organizations
The part of the Internal Revenue Code that allows employers to set up 401(k) plans is quite broad, including just about any type of employer who wants to use the provision. By contrast, 403(b) plans are available only to a much more limited set of employers that are set up as tax-exempt organizations. As a result, you'll typically only have access to a 403(b) plan if you work for a school, hospital, religious organization, or charity.
For many purposes, 403(b) plans are similar to 401(k) plans. Both allow you to save money on a pre-tax basis, effectively reducing your taxable income and earning a tax break in the year of your contribution. Both are eligible for incentives like the Saver's Credit. Also, the contribution limits are identical, with both plans allowing those under 50 to save up to $18,000 in 2015 and those 50 or older to save $24,000.
However, there are a few key differences. Although both 401(k)s and 403(b)s typically offer participants a menu of investment choices, 403(b) plans are limited to offering only annuities and mutual funds. In practice, that ends up being less of a difference, as most 401(k) plans also stick with fund options, but historically, many 403(b) providers have relied on annuity products that can be more expensive than similar mutual funds.
More broadly, you can expect your employer to have less involvement with a 403(b) plan than private employers take with 401(k)s. That might mean less of a chance at getting an employer match, but it can also mean that those employers who do match contributions often let them vest more quickly.
457 plans for government workers and some non-profits
457 plans, also known as 457(b) plans, are another type of retirement account that government employers and tax-exempt organizations can set up. Like 403(b)s, 457 plans let you save pre-tax money toward retirement, and they offer a menu of investment options to workers.
457 plans have an interesting wrinkle when it comes to contribution limits. For most workers, the same annual limits on contributions apply, with 2015's limits of $18,000 for those under 50 and $24,000 for those 50 or older. Yet 457 plans allow even bigger catch-up contributions to those within three years of the plan's normal retirement age, allowing them to contribute a total of $36,000.
In addition, unlike 401(k) and 403(b) plans, 457 plan contribution limits aren't coordinated with other retirement plans. That means that if your employer offers both a 457 plan and another retirement plan, you can essentially double dip and save twice the amount of those who have only a single plan.
If you work for a non-government employer that offers a 457 plan, there are some additional restrictions. Most importantly, assets in a nongovernmental 457 plan remain the property of the employer, which means that creditors can make claims against the money even though it was the employee electing to contribute. In addition, pension law states that nongovernmental 457 plans typically have to be limited just to highly paid employees, so they are commonly billed as executive perks and not for rank-and-file workers.
Use what you have
No matter whether you have access to a 401(k), 403(b), or 457 plan, taking full advantage of the ability to set money aside for retirement in a tax-favored way is a key element of achieving long-term financial success. Your employer will have more information on what choices are available to you and how you can assess your best strategy to use them.
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