The 403(b) Basics: Other Plan That May Be Available: 457(b)
The 457(b) is a retirement plan available to employees of state and local governmental agencies, and 501(c) organizations. You may be eligible to contribute to both a 403(b) and a 457(b).
How a 457(b) is Different From a 403(b)
The key differences are:
- Assets in a 403(b) are held directly by employees, while 457(b) assets are held in a trust for the benefit of employees.
- There is no federal 10 percent premature distribution penalty imposed on withdrawals from a 457(b) plan when separating from service.
How Much Can Be Contributed to a 457(b)
Participants may contribute up to $18,500 for year 2018. The limit was $18,000 from 2015 to 2017. In 2014 and 2013 the limit was $17,500. It was $17,000 in 2012.
Age 50 Catch-Up
Participants age 50 and older at any time during the calendar year are permitted to contribute an additional $6,000 in 2018. The age 50 catch up has been $6,000 since 2015. From 2009 to 2014 it was $5,500.
Employees who are three years from normal retirement age (as defined by the plan) are permitted the lesser of:
- two times current year’s normal retirement contribution limit or
- underutilized limits from past years. Note: not all employers make this additional catch-up option available nor are they required to do so. Check with your employer for details.
Investment Products Available in a 457(b)
Mutual funds and annuity products (which can include fixed annuities, equity-indexed annuties and variable annuties) may be offered. See your specific plan for details.
This is a provision that permits employees to irrevocably designate all or a portion of their 457(b) as an after-tax Roth contribution. This type of contribution will not lower the employee's taxable income. However, distribution of Roth designated funds in retirement will not be subject to taxation.
Participants have the option of making pre-tax 457(b) contributions, Roth 457(b) contributions, or as a combination of the two. Total contributions cannot exceed the year's contribution limit. Not all employers offer a Roth 457(b), nor are they required to do so. Check with your employer for details.
- Age 70½
- Separation from service (see below)
- Upon retirement
- Unforeseen emergency (see below)
- Divorce (see below)
- Death (see below)
Borrowing Money From Your 457(b)
Subject to availability and any additional conditions applied by individual vendors. IRS limits loans to the lesser of:
- One half of account value
What Happens to Your 457(b) If You Leave Your Employer
- Assets may be transferred to your new employer's plan if permitted by that plan.
- Assets may be moved to a rollover IRA at an institution of your choice. This will permit the money to continue to grow tax-deferred.
- You may leave the money in your current plan and continue to enjoy tax-deferred growth. If your account has less than $5,000, you may be required to transfer assets. Check with your employer for details.
- You may take a lump sum distribution. Unlike the 403(b), there is no 10 percent early withdrawal penalty for withdrawing 457(b) money upon separation of service. Withdrawals will be taxed as ordinary income.
Unforeseen Emergency Withdrawal
Unforeseen emergency withdrawals are permitted from your 457(b) account if the employee is under severe financial distress. The IRS definition of what qualifies as an unforeseen emergency is very specific and more stringent than the definition of hardship under the 403(b) plan. The emergency must be unexpected and unanticipated. Furthermore, the employee must have no other resources available to alleviate the stress, such as selling assets or obtaining a loan from a financial institution. Check with your vendor and employer for more information.
Unlike the 403(b), disability itself is not a distributable event. However, it may be considered an unforeseeable event and you may be able to withdraw money, subject to certain rules and restrictions. Check with your employer and vendor for details.
What Happens to Your 457(b) in the Event of a Divorce
Some or all of the balance in your 457(b) account may be transferred. Distribution to an alternate payee will be permitted if it is made pursuant to a qualified domestic relations order (QDRO). This is a decree, judgment, or order that meets the qualification requirements of the Internal Revenue Code. Those requirements include the following:
- It must have been issued under a state's community property or other domestic relations law.
- It must relate to the provision of alimony, child support, or the property rights of a spouse, former spouse, child, or other dependent (alternate payee).
- It must assign to the alternate payee the right to receive all or a portion of the participant's plan benefits.
- It must clearly specify (1) the names and addresses of each alternate payee, (2) the amount or percentage of the participant's benefit to be paid to each alternate payee, (3) the period of time over which the order applies, and (4) each plan to which the order applies.
- When discussing property distribution in contemplation of a divorce, you should make certain that your attorney ensures that the distribution of your 457(b) assets and all other retirement plan assets meet the requirements of a QDRO.
What Happens to Your 457(b) in the Event of Death
Death benefits are paid to a beneficiary or beneficiaries on file with your vendor. How the proceeds are distributed depends upon the age of the participant upon death and beneficiary's relationship to you. You should review your beneficiary designations annually and update them as necessary through your 457(b) vendor.
Withdrawal Requirements for 457(b) Money
You must begin to take withdrawals from your 457(b) no later than April 1 of the year following the year in which you turn age 70½. If you are still working, you can delay withdrawal from your 457(b) until April 1 following the year in which you retire.
See this IRS story on Required Minimum Distributions (RMD).
Higher Ed Stories
Inga Chira is a professor and a CFP®. Here is her perspective on the 403(b) vs. 457(b) question.