401(k), 403(b), 457(b): Does it Really Matter?

By Ian Berger, JD
IRA Analyst
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There are three types of company savings plans:

• 401(k) plans if you work for a for-profit company;
• 403(b) plans if you work for a tax-exempt employer, a public school or a church; and
• 457(b) plans if you work for a state or local government.

(This article doesn’t cover the Thrift Savings Plan for federal government workers and the military, or 457(b) “top-hat” plans for tax-exempt employers.)

If you’re saving through your work plan, you may not know – or care – which category your plan falls into. But should you care?

For the most part, it doesn’t matter which type of plan you’re in, since many features are exactly the same in all three. For example:

• Each plan allows elective deferrals up to $20,500 for 2022, and employees who are age 50 or older can make an additional $6,500 of catch-up contributions.
   
• All three can allow Roth contributions and plan loans.
   
• Hardship withdrawals are usually available, although the 457(b) hardship standard is stricter than the 401(k)/403(b) standard.
   
• Required minimum distributions (RMDs) are required, but the “still-working exception” may be used. If you don’t own more than 5% of the company, that exception allows you to defer RMDs until the year you retire or separate from service.
   
• You must be allowed to directly roll over eligible distributions from all three plans to IRAs or other plans. However, your employer must withhold 20% for federal income taxes if you don’t directly roll over your payout.
   
• All three can allow in-service distributions at age 59 ½.

But there are also some important differences among the plans that you should be aware of:

• While 401(k) and 403(b) plans can offer after-tax contributions, 457(b) plans can’t.
   
• In determining RMDs, 403(b) plans can be aggregated, but 401(k) and 457(b) plans can’t be aggregated.
   
• A 10% early distribution penalty applies to 401(k) or 403(b) distributions made before age 59 ½. For some reason, the penalty doesn’t apply to 457(b) distributions – except for distribution of monies previously rolled over into the plan from non-457(b) plans or IRAs.
   
• Only 403(b) plans allow for a special catch-up contribution if you have at least 15 years of service. Only 457(b) plans allow a special catch-up for the last three years before your retirement date.
   
• Whether your plan dollars are protected from creditors depends on which plan you’re in. You enjoy complete protection under ERISA if you’re in a 401(k) plan (except the Thrift Savings Plan) or a 403(b) plan where your employer makes contributions. If you’re in a 403(b) plan where your employer doesn’t contribute (and isn’t administratively involved with the plan) or you’re in a 457(b), you only have whatever creditor protection is available under your state’s laws. That protection varies from state to state.