Roth IRA and 457(b) plans both give savers tax-advantaged ways to fund a secure retirement. Roth IRA accounts are funded with after-tax dollars that then grow tax-free. A 457(b), meanwhile, is like a 401(k) for certain government and non-profit employees. A financial advisor can help you learn about different types of retirement accounts.
Roth IRA Basics
Roth IRA retirement accounts are funded with after-tax dollars. This means you can’t deduct money contributed to a Roth IRA from your current income when filing your tax return. However, you don’t have to pay taxes on earnings from investments in a Roth IRA. And you can withdraw contributions without owing taxes at any time.
In addition to enjoying tax-free growth, you can make withdrawals of earnings from a Roth IRA without owing taxes or penalties, as long as you are over age 59.5 and it has been at least five years since you opened the Roth account. If you are younger or haven’t had the account for five years, you may owe taxes plus a 10% penalty on withdrawn earnings.
Unlike most other retirement accounts, Roth IRAs are not subject to required minimum distributions (RMDs) – mandatory withdrawals that start at age 73. This can be a significant advantage depending on your circumstances.
Anybody can open a Roth IRA as long as they have earned income. A Roth IRA does not have to be sponsored by an employer as, for instance, a 401(k) does.
There are Roth IRA income limitations, however, as well as caps on annual contributions. The most you can contribute to a Roth IRA for 2024 is $7,000 (up from $6,500 in 2023). You can save up to $8,000 if you’re age 50 or older (up from $7,500 in 2023). This amount adjusts annually.
Your annual allowed contribution may be lower if, in 2024, you make more than $146,000 and your tax filing status is single or $230,000 and you file jointly. This amount also adjusts annually for inflation. The allowed Roth IRA contribution may decline as your modified adjusted gross income (MAGI) increases until, at $161,000 for single filers and $240,000 for joint filers, no contribution is allowed.
You may be able to get around the contribution limits by contributing first to a traditional IRA and then converting that account to a Roth IRA. This is known as a backdoor Roth IRA.
457(b) Basics
Some state and government local employees, as well as non-profit workers, can use a 457(b) plan to save for retirement. These are typically tax-deferred accounts, so savers can deduct contributions from current taxable income, providing immediate tax savings. However, Roth contributions using after-tax dollars can also be made to 457(b) plans.
Contributions to 457(b) plans are also limited. For 2024, participants in 457(b) plans can defer up to $23,000 in earnings to contribute to the plan (up from $22,500 in 2023). Savers age 50 or older can add $7,500 for a total contribution of $30,500 (up from $30,000 in 2023)
In addition to providing current tax deductions, contributions to a 457(b) account can be invested and grow tax-deferred. This is similar to the way traditional IRAs and other retirement plans treat contributions and earnings.
A 457(b) plan participant has more flexibility than other retirement savers when withdrawing funds. If the employee leaves their job, for instance, they can withdraw funds without any penalties, even if they’re younger than age 59 ½. Participants in 457(b) plans can also roll the accounts over into other retirement accounts, including IRAs and 401(k)s if they leave their jobs.
Comparing Roth IRA and 457(b) Plans
Here’s a table directly comparing important features of Roth IRA and 457(b) plans:
| Roth IRA | 457(b) | |
|---|---|---|
| Who can own one | Anyone with earned income below an annual limit | State or local government workers, and non-profit employees, if offered by the employer |
| Tax treatment of contributions | After-tax contributions are not deductible from current income | Pre-tax salary deferral deducted from current income |
| Tax treatment of investment growth | Can be withdrawn without owing income tax after age 59 ½ if the account is at least five years old | Taxes deferred until withdrawal |
| Annual contribution limits for savers under the age of 50 | $7,000 | $23,000 |
| Penalty on withdrawals before age 59 ½ | No penalty on withdrawals of contributions; 10% penalty on withdrawn earnings | No penalty on withdrawals of earnings or contributions if the saver has left their job |
| Taxes on withdrawals of investment earnings before age 59 ½ | No taxes on withdrawals of contributions; withdrawn earnings are taxed at a normal rate | Taxes applied to withdrawals of contributions and earnings |
Bottom Line
Roth IRA and 457(b) accounts offer tax-advantaged ways to save for retirement. Almost anyone can open a Roth IRA account, while 457(b) plans are only available to employees of state and local governments that sponsor the plans, and some non-profit workers whose employers offer them. Roth IRAs are funded with after-tax dollars, while 457(b) plans can be funded with pre-tax or after-tax dollars.
Tips for Retirement
- Consider discussing your plan for retirement savings with a financial advisor. 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.
- SmartAsset’s Retirement Calculator tells you how much you will need to save every month in order to have enough to meet your anticipated financial needs in retirement.
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