Finance Friday - Comparing 457b and 403b Plans - Which One Is Suitable for You One Is Suitable for You (Guest Post)
If you are a teacher and want to start saving early for your retirement, it is a good decision. It’s never too early to save your hard-earned money in a retirement fund and use it later. And considering the financial downfall in 2020, it should be our prime new year resolution for 2021!
One of the best ways to perform this task is to sign up for employer-sponsored and tax-favored retirement savings plans. There are two plan types - the 403(b) and the 457(b). The two accounts have several things in common, but they also have some key differences.
Let’s check out the differences between these two plans and choose which one is best for you.
What is a 457(b) Plan?
A 457(b) plan is tailored to serve state and local government employees. If you are a police officer or a firefighter employed by a government, then also you can be eligible for this plan.
In a 457(b) plan, you don’t have to pay an early withdrawal penalty if you leave your job.
How much may you contribute towards a 457(b) Plan?
You may contribute up to $19,500 in 2021. You may also contribute an additional $6,500 in 2021 if you’re in your 50’s or more. If you are within three years of your retirement age, then you might contribute as much as $39,000.
However, when you are within three years of normal retirement age, your maximum contribution is limited by previous contributions.
As per the IRS, the limit will be determined as - "The basic annual limit plus the amount of the basic limit not used in prior years (only allowed if not using age 50 or over catch-up contributions)”.
What are the pros and cons of a 457(b) Plan?
What is a 403(b) Plan?
A 403(b) plan is a retirement savings plan with good tax advantages, offered to public employees and workers employed in non-governmental companies.
This plan is required for a few workers, but might be optional for others. A 403(b) plan is available only to public school employees, certain ministers, and employees of tax-exempt organizations, such as charities and hospitals.
A 403(b) plan is closely similar to the conventional 401(k) plan, where a participant has to pay pre-tax contributions. You will be taxed when you make the withdrawals in retirement. Both the employer and the employees can contribute towards a 403(b) plan.
How much you may contribute towards a 403(b) Plan?
Like the 457(b) plan, 403(b) plans also have the basic contribution limits. In 2020, the contribution limit is $19,500. Both plans allow for a catch-up contribution of up to $6,000 per year for those who reach the age of 50 and more.
What are the pros and cons of a 403(b) Plan?
Overall, you should choose the type of plan considering the type of company you work for. It can be said that the 403(b) and 457(b) retirement savings plans are quite similar in many aspects.
But as per most reviews, a 457(b) plan is a better option than a 403(b) plan simply because you can contribute more money to it. The more contribution you can make, the more you can get after retirement. That future income can be the best solution to eliminate debt after retirement when you do not have any steady income.
On the other hand, the number of investment options under a 457(b) plan are fewer than the 403(b) plan.
So, after considering all the aspects you may choose from these two retirement saving plans and secure your future after retirement. Best of luck!
About Guest Writer
Patricia Sanders is a professional content developer and a regular contributor to debtconsolidationcare. She specializes in the financial niche and is well known for her unique financial tips that can be very effective. To get in touch with her (or if you have any questions regarding this article), email at email@example.com.
I'm Jayson, a high school social science teacher with a strong passion for social justice and public education issues.