Considering a 403(b) or 457(b) plan?
While public employees have lots of ways to save for retirement, two of the most popular are IRC Section 457(b) and Section 403(b) plans. Both provide for pre-tax contributions taxed as income when withdrawn, but there are some differences to consider when choosing the best option for you.
Many Washington public employees have access to a 457(b) plan through the Deferred Compensation Program (DCP) or similar savings plan. 403(b) plans are most often found in schools.
Both plans allow you to contribute directly from your paycheck before taxes, lowering your tax liability for the year. If you make $50,000 per year and contribute $2,500 of your salary to either type of plan, your taxes will be based on an income of $47,500. The $2,500 contribution is taxable upon withdrawal.
Both plans also have provisions for folks approaching retirement to save beyond plan limits. The plans differ in terms of contribution limits – how much you can defer and save each year – and when you can withdraw your contributions.
403(b)
In 2022, you can contribute, or defer, up to $20,500 from your salary under a section 403(b) plan.
Having more than one account doesn’t matter; this limit includes all 403(b) accounts. However, 457(b) contributions don’t count against this limit, so you could contribute $20,500 in your 403(b) and an additional $20,500 in a 457(b). Having 403(b) and 457(b) plans is one way to defer more than $20,500 in 2022.
Once you’re 50, you can contribute an additional $6,500 per year. And, if you’ve been with your employer for 15 years, you may contribute an additional $3,000 per year, up to a lifetime total of $15,000.
You can withdraw without penalty once you turn 59.5, and you must start withdrawing when you turn 73, unless you’re still working for the covered employer.
Find out more about 403(b) plans on the IRS website.
457(b)
DCP is a 457(b) plan.
Total contributions can be $20,500. What’s the advantage of a 457(b)? Portability.
If you leave the employer sponsoring your 457(b) plan, you can withdraw at any age without penalty. However, you can only withdraw contributions under specific circumstances while you’re still working.
457(b) plans also allow those 50 or older to contribute an additional $6,500 per year, but they have another catch-up provision that allows people three years from plan-specific retirement age, essentially, to double their annual contributions.
Find out more about 457(b) plans at the IRS website.
Choosing between 403(b) and 457(b) plans
Many customers only have access to one type of plan and can use it effectively to help them retire securely. Check with your employer to see whether you’re able to invest in both 457(b) and 403(b) accounts if you’d like to save more; most public workers in education have access to both.
Contribution, withdrawal and catch-up provisions are important factors to consider. Fund performance and fees are also critical to consider.
This is where Washington’s DCP shines.
With some of the lowest fees in the marketplace, DCP investments are guided by the experts at the Washington State Investment Board. There are options for folks who want to set-it-and-forget-it or for those who want to take a more active role in investing.
Find out more at www.drs.wa.gov/dcp.
