If you are in your prime earning years or both you and your spouse work and have no children, you are likely to pay a higher tax rate in the current year than in the year you retire. To lessen the tax burden, you may shift some of the taxable income to future years through tax-deferred retirement savings plans. Depending on your employer, you may be able to take advantage of multiple employer-sponsored retirement plan opportunities.
Double Contribution Limits
A 403(b) plan and a 457(b) plan have the same contribution limits. As of 2012, you may defer up to $17,000. If you are 50 or older, you may contribute an additional $5,500 for a total deferral of $22,500. These limits are counted separately, so if you want you may contribute $17,000 ($22,500 if you are 50 or older) to each plan for a total deferral of $34,000 ($45,000 if you are 50 or older).
You can only have a 403(b) plan and a 457(b) plan if both plans are offered by your employer. Governmental employers, such as state governments, state schools or state hospitals are eligible to offer 457(b) plans to their employees. Employees of non-profit organizations, such as public schools, 501(c)(3) organizations, non-profit hospitals and certain ministers may contribute to a 403(b) plan. If you work for an employer that meets both sets of criteria, such as a state university, you may defer a portion of your salary into both plans.
Employer Contributions and Vesting
Employers may make contributions to both 403(b) plans and 457(b) plans on behalf of the employee, but employer matches are not as common as in 401(k) plans. If contributions are made, the total of the employee's and employer's contributions to each plan may not exceed the annual combined limit, which is $50,000 as of 2012. If your employer does contribute, you may defer up to $100,000 of income -- $50,000 in a 403(b) and $50,000 in a 457(b) -- per year.
Distributions from 403(b) and 457(b) Plans
Before putting your money in either type of plan, you need to know when you can access your funds. Both 403(b) plans and 457(b) plans may permit distributions in case of hardship or when you leave your job. One significant difference is that if you take an early withdrawal from a 403(b) plan, you owe an additional 10 percent tax -- unless you qualify for an exception -- on top of income taxes. With a 457(b) plan, distributions are taxed, but they are never subject to an additional tax on early distributions.
- Internal Revenue Service: Retirement Topics - Contributions
- Internal Revenue Service: Publication 4484
- Internal Revenue Service: Publication 571
- Internal Revenue Service: Retirement Topics - 403(b) Contribution Limits
- Internal Revenue Service: Retirement Topics - 457(b) Contribution Limits
- Internal Revenue Service: Determinations - Summary of EGTRRA Changes for Retirement Plans
- University of Maine: Retirement Savings Plan
- Motley Fool: To 403(b) or Not to 403(b)
- UCLA: 403(b) & 457(b) Payroll Deductions
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