401(k), 403(b), and 457(b) Plans

These are employer-sponsored retirement savings plans that allow employees to contribute a portion of their salary on a pre-tax or Roth (after-tax) basis. The 401(k) is common in for-profit companies, the 403(b) in nonprofits and education, and the 457(b) in government and some nonprofit organizations. Each has its own contribution limits and unique rules.

Employer-sponsored retirement plans are among the most common vehicles for building retirement savings. The 401(k) plan is offered primarily by for-profit employers and allows employees to defer a portion of their compensation into the plan on a pre-tax or, increasingly, a Roth (after-tax) basis. Many employers also offer matching contributions, which can represent a significant additional benefit.

The 403(b) plan — sometimes called a tax-sheltered annuity — serves a similar purpose but is available to employees of public schools, churches, and certain tax-exempt organizations. Historically, 403(b) plans offered fewer investment options, often limited to annuity contracts. Today, many 403(b) plans also offer mutual fund options, though the range of available investments can still vary widely.

The 457(b) plan is available to state and local government employees and some non-governmental, tax-exempt organizations. One distinctive feature of governmental 457(b) plans is that withdrawals before age 59½ are not subject to the 10% early withdrawal penalty that typically applies to 401(k) and 403(b) plans, which may make them attractive for those planning early retirement. However, non-governmental 457(b) plans have different rules and may carry additional risk.

For 2024 and 2025, the employee contribution limit for these plans is $23,500 (2025), with a catch-up contribution of $7,500 for those age 50 and older. Importantly, 457(b) plans have a separate contribution limit from 401(k) and 403(b) plans, so individuals with access to both a 403(b) and a 457(b) — common in education and healthcare — may be able to defer into both plans up to the maximum in each.

Understanding the differences between these plans, including their investment options, withdrawal rules, and employer matching provisions, could help you maximize the value of your workplace retirement benefits.

Why This Matters

For many people, employer-sponsored retirement plans represent their primary retirement savings vehicle. Knowing which plan or plans you have access to — and their specific rules around contributions, matching, and withdrawals — may help you develop a more effective savings strategy and potentially reduce your current tax burden.

Have questions about 401(k), 403(b), and 457(b) Plans?

Understanding the concepts is the first step. If you would like to explore how this applies to your situation, schedule a complimentary conversation.

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