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Many non-profits, public schools, universities, state governments have access to either a 403(b) or a 457(b) retirement plan. Both the 403(b) and the 457(b) are retirement plans that these institutions can offer employees in addition to or in lieu of a defined-benefit pension. For ease of simplicity, think of these plans as a 401(k), but for non-profits. We won’t get into the minutia of exactly how they’re different here.
Like their 401(k) counterpart, the 403(b) and the 457(b) allow their owners to defer from their salaries up to $17,000 annually, on a pre-tax, tax-deferred basis. For those aged 50 and over, the IRS allows an additional $5,500 age-based catch-up contribution. These numbers are for 2012, they are indexed annually for inflation.
There is a select group of people that may have access to both the 403(b) and the 457(b). For these chosen few, there is an opportunity to save even more money. Here’s why: Let’s say you work for two employers, one is a for-profit that offers a 401(k) and one is a non-profit that offers a 403(b). By law, you are allowed to put in $17,000 total among both accounts – meaning $17,000 aggregated between the two accounts. So you could put in $9,000 in the 401(k) and $8,000 in the 403(b), and other different combination as long as your total between the two doesn’t exceed $17,000. For the age based catch-up, the aggregate between the accounts cannot exceed $22,500.
Now, let’s say you have access to both a 403(b) and a 457(b). Technically speaking, the 457(b) is considered a non-qualified plan – meaning it isn’t subject to certain ERISA requirements. One of those requirements it’s exempt from is the aggregation rule. What does this means for the chosen ones? It means that they can now contribute $17,000 to the 403(b) and another $17,000 to the 457(b) – for a total of $34,000, annually!
As you can see, these numbers can really add up especially if you’re nearing retirement and wanting to save all you can. It also comes in handy if you’re expecting a contract buy-out at retirement and or have unused vacation or sick time coming your way. No need to take that as a lump sum and have it taxed. Simply defer it to your 403(b), and once your 403(b) is full, move the remainder to your 457(b) or vice versa.
Talk to your employer to see what they offer and see if you’re one of the lucky ones!
Sterling Raskie, MSFS, CFP®, ChFC®
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Is there a reason that both 403(b) and 457(b) have a b? Or is it just a coincidence?
Note that you can also contribute to a Roth IRA (probably) and a 401(a) defined-contribution plan. There is a limit that covers the sum of the 403(b), 457(b), and 401(a) contributions, but I think it’s 3x the limits of each (though it also includes employer contributions. I think.)
Basically, they are the sections in the Code. However, the 457(b) differs from the 457(f) in that the 457(f) is used for highly compensated employees of non-profits. It’s an ineligible plan meaning that it’s non-qualified and used for non-profits to allow highly compensated employees to contribute more than the maximum deferral limit.
Very cool strategy for those who may be in this double benefit situation.