The 403(b) and 457(b) are two types of U.S. employer-sponsored retirement plans, similar in many respects to the more widely known 401(k). However, they are designed for employees of public institutions, schools, non-profit organisations, and certain government agencies. Both plans offer tax-deferred savings, investment growth, and a structured path to retirement, but they operate under different rules — especially when it comes to withdrawals, eligibility and contributions.
While many people working in education or the public sector may be enrolled in one of these plans by default, understanding how they differ — and when they can be used together — can improve how and when they’re used. When managed properly, they offer significant long-term advantages.
403(b) plans
The 403(b) is sometimes referred to as a tax-sheltered annuity (TSA), although the term is outdated. It’s offered by public schools, colleges, universities, churches and eligible non-profit organisations.
Contributions are made through payroll deductions, and they reduce your taxable income in the year they’re made. Investments grow tax-deferred, and withdrawals are taxed as ordinary income.
In 2025, the contribution limit is $23,000, with an additional $7,500 catch-up allowed for individuals aged 50 and older.
Some 403(b) plans also include a 15-year rule allowing certain long-term employees to make an additional $3,000 contribution per year, up to a $15,000 lifetime maximum. This is separate from the age-based catch-up, but not always available.
Investment options
Unlike 401(k)s, many 403(b)s are limited to annuity contracts and mutual funds. Historically, this made them prone to high fees and commissions, especially when sold through insurance companies. Modern 403(b)s have improved, but plan quality still varies widely between employers.
Roth 403(b)
Some plans also offer a Roth 403(b) option, where contributions are made with after-tax dollars and qualified withdrawals are tax-free. As with Roth 401(k)s, there are no income limits to participate.
Withdrawals and penalties
Withdrawals before age 59½ are subject to a 10% early withdrawal penalty, unless an exception applies. Required Minimum Distributions (RMDs) must begin at age 73 unless the participant is still working for the employer offering the plan.
Loans and hardship withdrawals may be allowed, depending on the plan’s rules.
457(b) plans
The 457(b) is a deferred compensation plan available to state and local government employees and certain non-profit employees. Like the 403(b), it offers tax-deferred savings, similar contribution limits, and traditional or Roth options in some plans.
In 2025, the 457(b) also has a $23,000 contribution limit, with a $7,500 catch-up for those aged 50 and older. However, the 457(b) is unique in that catch-up options can overlap for certain employees near retirement, allowing higher contributions under special rules. These “final three years” catch-up rules can allow up to $46,000 of contributions in some cases, if prior limits were not fully used.
Key differences from 403(b)
The main distinguishing feature of a 457(b) is that early withdrawals are not penalised when taken after separating from service — even if you’re under age 59½. This makes the 457(b) particularly useful for early retirees or those planning a phased retirement before their 60s.
457(b)s also tend to have better withdrawal flexibility, though investment options may be more limited and vary depending on the employer.
RMD rules apply starting at age 73, unless the employee is still working.
Using both plans
Some employees — especially those in public education or government — may be eligible to contribute to both a 403(b) and a 457(b) at the same time. These are treated as separate plans under IRS rules, which means you can contribute the full annual limit to each account.
That means a person under 50 can potentially contribute up to $46,000, and someone over 50 could contribute $61,000 in total between the two. This is particularly useful for high earners or those trying to catch up on retirement savings in the final years before retirement.
It also allows for greater flexibility in drawdown strategy — for instance, accessing the 457(b) earlier while allowing the 403(b) to continue growing.
When each plan makes sense
- If you’re planning to retire early, the 457(b) is more flexible due to no early withdrawal penalty.
- If your 403(b) plan offers low-cost index funds and a Roth option, it may be more suitable for long-term, tax-free growth.
- If you qualify for both, using them together maximises tax-advantaged space.
- If you’ve changed jobs and accumulated both types of plans, consolidating may be possible — but should be done carefully, especially if a 457(b) is involved.
Seen from Pension Gruber
Guests from the U.S. education or public service sectors often bring up 403(b) and 457(b) plans — some with clear confidence, others not sure what they’ve been paying into. The ones who understood early how both plans worked tend to have more flexibility now. They can travel, take longer breaks, and don’t worry about market dips because they’ve already built enough stability into their drawdown plan.
Others admit they stuck with high-fee annuity-based 403(b)s for years without reviewing their options, only to find out later they could have saved more by switching providers or using both plans.
The tools were there — the challenge was knowing how to use them. Like most retirement accounts, these aren’t complicated once explained, but no one explains them unless you ask.
