When it comes to establishing a retirement plan, understanding the different options available is crucial. For some organizations, the types of retirement plans often compared are the 457(b) plan and the 401(k) plan. While they share some similarities, there are differences between the two that should be considered. In this blog post, we will explore the distinctions between 457(b) and 401(k) plans, helping you make informed decisions to secure your financial future.

The Basics: A 401(k) plan is a savings plan commonly offered by private sector employers, but can also be offered by other types of organizations. Contributions and earnings are not subject to taxation until withdrawal. It enables employees to contribute a portion of their pre-tax salary, with tax-deferred growth until retirement.

A 457(b) Plan is typically offered by government entities, non-profit organizations, and select healthcare institutions. It also allows employees to defer a portion of their salary, which is then invested and grows tax-deferred until retirement. Contributions and earnings are only taxed when withdrawn.

Employer Type: One key distinction lies in the type of employer offering the respective plans. 457(b) plans are typically offered by government and non-profit organizations, whereas 401(k) plans are primarily offered by private sector employers.

Contribution Limits: Both 401(k) and 457(b) plans have similar contribution limits with salary deferrals for both capped at $22,500 in 2023. For employees 50 and older, an additional $7,500 in “catch-up” contributions can be made.

Withdrawal Options: 457(b) plans offer more flexibility in terms of withdrawal options. Employees can make penalty-free withdrawals upon retirement, irrespective of their age. In contrast, 401(k) plans may impose penalties for early withdrawals before the age of 59½, although exceptions apply.

Rollover Options: Both types of plans allow for penalty-free rollovers to another eligible retirement plan or IRA. 401(k) plans may have additional restrictions or conditions depending on plan requirements.

Non-qualified Deferred Compensation: 457(b) plan sponsors can also provide a non-qualified deferred compensation feature, known as a 457(f) plan. These plans provide high-income earners with additional benefits but are subject to specific rules and limitations.

In summary, 457(b) and 401(k) plans are very similar in how they operate, with the main distinction being what type of entity may offer each type of plan. RetireBetter is here to help you determine which type of plan will best suit your organization. With expert advice, personalized solutions, and knowledgeable staff, we are your trusted partner in helping employees find a way to RetireBetter.

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