Can I Max Out Both 403(b) and 457(b) Plans?
403(b) vs 457(b) Plans
One of the significant benefits of working for a state or local government is the option to enroll in a 457(b) plan. These plans are typically available in state governments, hospitals, and higher education. If you are a higher-income physician, for example, and you work in a university health system, this represents a unique opportunity that you would not find in private hospitals. The same applies to university faculty and staff who have maxed out their 403(b) plans and are looking at additional retirement savings opportunities.
The two types of retirement plans commonly found in government and nonprofits:
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403(b) Plan: This is typically available to employees of non-profit organizations, including public schools, hospitals, and certain tax-exempt organizations.
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457 Plan: This is available to employees of state and local governments, as well as certain non-profit organizations. There are two types of 457 plans: 457(b) plans for employees of state and local governments and 457(f) plans, which are usually for highly compensated executives in non-profit organizations.
You can save in a 403(b) plan, the government equivalent to a 401(k) plan in the private sector. But you can save the same amount in a 457(b) plan. So in 2023, that would be $22,500 (under age 50) in each plan or $45,000 in both! In the private sector, you can only save $22,500 (under 50) for 2023 across all plans. So you need to be very careful if you go between jobs in one calendar year and overcontribute to your 401(k) plan. This can often happen but do not worry about the 457(b) plan, as the limit is not aggregated.
A 457(b) can only be established by a state or local government or a tax-exempt organization. Therefore, you will not find this unique plan and opportunity to save for retirement in the private sector. However, I've found that many who work in government have not heard about this plan. Or they believe that a pension will cover their retirement needs.
You can either do a pre-tax version of the 457(b) plan or a Roth (if available tax-free), to which you contribute after-tax dollars. What is unique about the 457(b) plan beyond not being aggregated with the 401(k) or 403(b) limits is that you can take money out of this plan after you separate from service with no 10% early withdrawal penalty. With 401(k) and 403(b) plans, you typically have to wait until age 59.5.
What is a recommended strategy?
I would say start by first maxing out your 403(b) plan. Then, contribute to a 457(b) plan after the 403(b) is maxed out or you reach the employer match. The simple reason is that 403(b) will most likely have a match if you do not have a state pension. So if you have a state pension, contribute additional money to the 457(b) plan rather than the 403(b) plan. But this would all depend upon your circumstances, and you would need to speak to a financial planner to develop a strategy that meets your needs. You must also determine the right investment options that fit your goals and risk tolerance. These plans typically enable you to invest in mutual funds so you have to be careful on what funds you select to reach your retirement goals.
Working in state and local government has many opportunities for excellent employee benefits. Learn more about 457(b) plans as a way to save additional money towards your retirement beyond your pension or 403(b) plan. Contact me on the contact page below if I can be of service.
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on to avoid federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.
