It’s never too early to begin saving for retirement. Whether you’re new to the workforce or have years of experience, taking advantage of employer-sponsored, tax-advantaged retirement plans can set you up for long-term financial success. Two common options are the 403(b) and 457(b) plans. Both allow you to contribute a portion of your salary toward retirement. However, there are differences in the way a 403(b) vs. 457(b) work. And knowing those differences can help you make the right choice for your situation.
A financial advisor can also provide advice and guidance tailored to your retirement planning needs.
What Is a 403(b) Plan?
A 403(b) plan is a tax-advantaged retirement savings plan that’s typically offered to public employees and workers for non-governmental organizations. The plan is required for some workers, but it’s optional for others.
Similar to 401(k) plans, 403(b) plans also collect pre-tax contributions, and you’re taxed once you make withdrawals in retirement. The contributions for a 403(b) plan can be made by both the employer and the employees. As with a 401(k), you will face penalties if you make withdrawals from a 403(b) before age 59.5.
What Is a 457(b) Plan?
The 457(b) plan is a tax-advantaged retirement savings option for public employees. It allows you to defer a portion of your salary into the plan using pre-tax dollars. When you retire, withdrawals are taxed as ordinary income.
While the 457(b) and 403(b) plans share many similarities, one key difference stands out: The 457(b) plan doesn’t impose an early withdrawal penalty if you take money out after leaving your job. This flexibility makes it a unique option among employer-sponsored retirement plans.
403(b) vs. 457(b) Plans: Eligibility
The IRS allows certain employees to contribute to a 403(b) plan. Eligible participants include:
- Public school employees involved in daily school operations
- Employees of public school systems run by Indian tribal governments
- Employees of hospital service organizations
- Employees of 501(c)(3) tax-exempt or charitable organizations
- Certain ministers
- Civilian faculty and staff at the Uniformed Services University of the Health Sciences
To qualify, individuals must meet these employment criteria.
For the 457(b) plan, eligibility extends to state and local government employees. They can participate if their employer — a state government or tax-exempt organization — offers a 457(b) plan.
403(b) vs. 457(b) Plans: Contributions
You must consult with your employer to make contributions to your 403(b) plan. Because this plan allows you to invest pre-tax money from your wages, you must tell your employer the amount you want deferred and deposited into your 403(b) account. This process is sometimes called an elective deferral.
Through an elective deferral, you are designating a percentage of your paycheck into your 403(b) account. This automatically decreases your take-home pay, lowers your taxable income and, most importantly, boosts your future retirement fund.
Some employers will also contribute to their employees’ 403(b) accounts. Many employees will make contributions based on what you contribute to your own plan, called a matching contribution. However, employers may also contribute without asking for anything in return. With the 457(b) plan employees can similarly deduct pre-tax money from their wages as a contribution toward their plan.
Though understanding the contribution process is important, you should also be aware of the contribution limits for both plans. A contribution limit is the maximum amount of money you can defer per year through a retirement plan.
As of 2025, the contribution limit for both a 403(b) plan and a 457(b) plan is $23,500 (up from $23,000 in 2024). Both plans allow employees aged 50 and older to benefit from an additional “catch-up” contribution of $7,500, bringing the maximum allowed contribution in 2025 to $31,000.
The 403(b) and 457(b) plans differ in that the 457(b) plan lets workers who are within three years of normal retirement age as specified in the plan make special catch-up contributions.
While the 403(b) plan doesn’t offer this provision, it does provide employees who’ve secured a tenure of 15 years with certain provisions. These employees can contribute an extra $3,000 per year as long as they’ve contributed an average of $5,000 or less for those 15 years prior.
403(b) vs. 457(b) Plans: Taxes
When you withdraw money from a 403(b) or a 457(b) in retirement, you’ll pay taxes on those withdrawals. However, in some states, retirement plan income is exempt from state income taxes.
The 457(b) plan rules state that you don’t have to pay a 10% tax penalty if you resign or retire before age 59.5 and need to withdraw money from your account. The 403(b) plan charges a 10% early withdrawal penalty. However, under the CARES Act, those over age 55 who have lost their job could also take out money without penalty.
Who Offers 403(b) and 457(b) Plans?
The IRS only allows public schools or 501(c)(3) organizations to establish and offer 403(b) plans. State and local government employers offer 457(b) plans. An employer doesn’t have to offer a 457(b) plan to all employees. You may want to check with a financial advisor if you think you could qualify for a plan.
Bottom Line
Overall, the type of plan you can choose depends largely on the type of company or organization you work for. You won’t have control over the plan your employer provides, but you will have control over the knowledge you bring to managing and saving retirement money. Although the 403(b) and 457(b) retirement savings plans are similar in many ways, you must take advantage of either of these tax-favored plans if you meet the eligibility requirements.
Retirement Planning Tips
- A financial advisor can help answer all the questions you have when it comes to retirement savings. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Brainstorm and map out what you hope to financially accomplish before retirement. Make sure to research the different types of employer-sponsored accounts offered to determine whether you’re eligible. It’s likely that you are.
- After you’ve done the planning and research for your retirement savings goals, it’s important that you implement your enhanced financial awareness into your approach toward saving.
Photo credit: ©istock.com/designer491, ©istock.com/designer491, ©istock.com/lovelyday12