There are many retirement plans in U.S., and while majority of the population is aware of 401k, there are also 403b and 457, which are similar to 401k. While 401k is available to all private sector employees, 403b is available to non profit employees, and 457 is applicable to government employees. There are many differences between 403b and 457 which an employee needs to be aware of, so as to be able to derive maximum tax benefits and also to have better returns on investment.
403b
As told earlier, this plan is for employees of non profit organizations such as schools, hospitals, cooperatives etc. So if you happen to be a teacher, nurse, a minister or a librarian, you are a candidate for 403b. The tax structure of a 403b is similar to 401k, as you make contributions through your salary on a pre tax basis and they attract interest. It is when you start receiving monthly payments from the plan on maturity are you required to pay taxes just like any other ordinary income. This is why 403b is also known as Tax Sheltered Annuity (TSA). This plan is popular among non profit organizations, and employers opt for it as it is exempt from Employer Retirement Income Security Act which implies that the employer can offer this plan to all, a group or to individuals whom he likes to pass on the benefit.
457
457 is a retirement benefit plan that is open for mostly government sector employees. The employer offer this plan which works along the same lines as that of 401k, and the contributions made by an employee are exempt from tax, which is applicable only when the employee starts receiving the benefits upon completion of the plan. Thus this is a tax deferred plan. But unlike 401k or 403b, there is no penalty for withdrawal before the age of 59 ½ . However, the amount withdrawn is subject to ordinary taxation. This plan allows employees to save a part of their income without paying tax on it or the earnings that accrue in the form of interest,
Difference between 403b and 457
Both are tax deferred plans.
In 457, there is no minimum retirement age which translates into no penalty upon withdrawal of money which is very much there with 403b and 401k.
What is notable is that if an employer offers both 457 and 403b, an employee can choose to contribute to both from his salary.
While under 403b, an employee can withdraw money for unforeseen emergencies such as buying a home or for the education of his son, he is not eligible for distribution under 457.
If an employee is contributing in 457, he cannot open an IRA account. However, 457 can be rolled over into an IRA account.
One notable difference between 403b and 457 is that employer cannot make contributions to employees opting for 457 as they can to those who accept 403b or 401k.
There are also differences in the contribution limits of 403b and 457.