Your first day as a teacher, a nurse, or a city employee comes with a benefits packet, and inside it is a retirement form with a number on it that is not 401(k). It might say 403(b). It might say 457(b). It might offer both. Here is what each one is, where a 403(b) hides costs a 401(k) does not, and why being offered both is worth real money.
Who Gets Each Plan
A 403(b) comes from public schools, colleges and universities, churches, and charities that are tax-exempt under section 501(c)(3) of the tax code. Teachers, professors, nurses at nonprofit hospitals, and nonprofit staff are the usual holders.
A 457(b) comes from state and local governments, and in a narrower version from those same tax-exempt nonprofits. City workers, county employees, police, firefighters, and many school district staff can get one.
Plenty of public employers offer both. Many workers with either plan also have a pension, so the account adds to that rather than replacing it.
A 403(b) Is a 401(k) With a Different History
Mechanically the two are near twins. Money leaves your paycheck before you see it, in pre-tax dollars or Roth dollars. You pick investments inside the account. Withdrawals before 59½ generally cost income tax plus a 10% penalty. Your employer may add a match, though public plans do that less often than private ones.
The yearly contribution limit is the same one 401(k) savers use. Money you put into a 403(b) and a 401(k) in the same year counts against one shared cap. The IRS resets it most years, so look up the current figure rather than trusting an old one.
One extra feature is worth asking about. If you have 15 years of service with a school, hospital, health or welfare agency, or church, your plan may allow an extra catch-up contribution above the normal limit. The plan has to offer it and the math is fiddly, so ask your benefits office whether yours has it.
Why the 403(b) Menu Is Often Expensive
For decades a 403(b) was called a tax-sheltered annuity, and the law still shows it. A 403(b) can hold annuity contracts sold by an insurance company, or a custodial account holding mutual funds, and not much else. Annuities dominated for most of the plan's life, and many school district plans still run on them.
Annuity contracts often carry a surrender charge. Take your money out of the contract too early and you pay a percentage of what you withdraw. The charge shrinks each year until it reaches zero, and that schedule can run for years.
The bigger problem is who picks the menu. Public school 403(b) plans are generally not covered by ERISA, the federal law that puts fiduciary duties on private retirement plans. Many districts let any vendor who signs an agreement sell to employees. That can mean a dozen vendors and nobody negotiating on your behalf. A big company's 401(k) gets institutional pricing because the employer buys for thousands at once. A teacher picking a vendor in a break room is buying retail, and small fee differences compound into big ones.
What to Ask Before You Pick a Vendor
Which vendors does the plan allow, and can I see the list?
Is this a custodial account holding mutual funds, or an annuity contract?
If it is an annuity, how long is the surrender schedule?
What is the expense ratio, and what other fees sit on top of it?
Does my employer contribute anything, and what must I do to get it?
The 457(b) Rule Nobody Expects
A governmental 457(b) has a feature no other workplace plan has. It is not a qualified retirement plan under the tax code, and the 10% early withdrawal penalty applies only to qualified plans and IRAs. So once you separate from service, you can take money out at any age and the penalty does not apply. You leave the job at 42 and withdraw at 43, no penalty. You still owe ordinary income tax on every dollar, and that part never changes.
For someone who plans to stop working before 59½, that is a real tool, and a reason to think hard before consolidating accounts. Two limits on it. Money you rolled into the 457(b) from a 401(k), 403(b) or IRA keeps its original penalty rules. And rolling the 457(b) balance out into an IRA hands the exemption back, because money in an IRA follows IRA rules.
Being Offered Both Is the Valuable Part
If your employer offers a 403(b) and a governmental 457(b), the two contribution limits are separate. The IRS says it plainly: the 457(b) limit "is not combined with your deferrals made to a 403(b) or other plans."
You can contribute the full annual limit to each one in the same year. That roughly doubles the tax-advantaged room available to you, which no private-sector worker with a single 401(k) can do. Most public employees never find out.
Nothing says you have to fill both. If only one of them carries an employer contribution, that is the one with a guaranteed return attached, as the employer match article explains. Past that point, the second plan is simply more room.
A Non-Governmental 457(b) Is a Different Animal
If your employer is a nonprofit rather than a government, its 457(b) is a different product wearing the same name.
The law limits these plans to a select group of management or highly compensated employees. Most staff never get offered one. The money is also not held in trust for you. The assets stay the property of the employer and remain available to its general creditors if it goes bankrupt. A governmental 457(b) has to hold your money in trust. A nonprofit one is barred from it.
You cannot roll the balance into an IRA when you leave, and there is no age 50 catch-up. Deferring pay into one is partly a bet that your employer is still solvent when the money comes due.
