The 403(b) vs 457(b) For Physical Therapists And Occupational Therapists

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403b vs 457b

If you’re a physical therapist or occupational therapist whose employer provides you with access to both a 403(b) retirement plan and a 457(b) retirement plan, then you’re probably wondering if you should prioritize contributing to one or the other.

Before moving forward with this article, I highly recommend that you first learn the basics about the 403(b) plan and a 457(b)  plan if you haven’t done so already.

One of the aspects covered in those articles is how the IRS allows you to contribute to both a 403(b) and a 457(b) up to each plan’s annual contribution limit. This opportunity can be a quite powerful savings/investing opportunity towards your eventual retirement.

But if you can’t afford to contribute the maximum allowable amount to both plans, which plan you should prioritize your contributions to?

This article will help you answer that very question by comparing and contrasting the 403(b) plan and the 457(b) plan on the following points:

  1. Who Owns The Account Balance?
  2. What Are The Investment Options?
  3. When Can You Withdraw Your Money? 
  4. How Much Can You Contribute?
  5. Do You Get Any Catch-Up Contributions?
  6. Do You Get A Roth Option?
  7. What Are Your Rollover Options?
  8. Can You Take Out A Loan On Your Balance?

I firmly believe every investment opportunity should have to fight in order to earn the right to get access to any of your hard-earned money.

That’s why the theme of this article is a boxing match.

In an actual boxing match, a knockout can occur as early as the first round, thereby making later rounds moot. Therefore, the more important attributes for the retirement plans covered here will be compared in the earlier rounds.

Let’s get started.

Round 1: Who Owns The Account Balance

We are starting off by comparing who owns the balance in each retirement account.

It makes sense to consider this the most important characteristic, since the other attributes a retirement plan offers you can become much less important if you don’t even own the money in the account.

403(b)

The moment your contribution is deposited into your 403(b) account, that money is yours. This is referred to as “immediate vesting.”

However, any money your employer contributes to your 403(b) may not immediately be yours. 

Some employers will gradually transition percentages of the money to you over time as you continue to work at your job. The amount of money and the speed at which this happens is determined by your employer’s vesting schedule. 

457(b)

The money in your 457(b) is owned by your employer, not you.

This can be a shocking revelation at first, but the type of 457(b) you have can make a big difference and possibly put your mind at ease.

Here’s a closer look at those types:

1. Governmental 457(b) Plan

If your 457(b) plan is a governmental plan, then the balance in your 457(b) account is held in a trust and backed by the government. 

If the government defaulted, it could take the money from your 457(b) account to pay back its creditors. 

2. Non-Governmental 457(b) Plan

If your 457(b) plan is a non-governmental plan, then you likely work for a non-profit.

If the non-profit went bankrupt, it could take the money from your 457(b) account to pay back its creditors. 

Who Wins This Round?

Not every employee with a 403(b) has an employer who makes contributions to their 403(b) account. If this is you, then you don’t even need to worry about a vesting schedule and you can consider your entire 403(b) account balance yours since all employee contributions vest immediately.

It’s hard to beat money that is effectively yours immediately, but if you have a governmental 457(b) plan, your account balance is probably nearly as safe. Let’s face it, if the government defaulted then there would be much worse things to worry about than your 457(b) account balance so the chance of that happening hopefully isn’t too great.

If you have a non-governmental 457(b) plan, then you should have more concerns. You will really need to learn as much about your employer’s financial standing as possible, which may be a tough task if they don’t share too much of this information. But if they seem to be firing many good employees all at once, that can be a clue that bad news is on the horizon.

In the end, even though a governmental 457(b) likely offers very minimal risk in this regard, a 403(b) has none.

Round 1 Winner: 403(b)

Round 2: Investment Options 

Where you are able to invest the money in your retirement account matters. After all, a big perk of having a retirement account is the ability to hopefully substantially grow your balance by means other than making contributions.

Unfortunately, both the 403(b) plan and the 457(b) plan are limited in their investment options.

403(b)

With a 403(b), your employer provides you with a list of vendors you may choose from. These vendors only allow two types of investments: Mutual funds and annuities.

457(b)

With a 457(b), your employer provides you with a list of vendors you may choose from. These vendors only allow two types of investments: Mutual funds and annuities.

Who Wins This Round?

After reading the above, you may think this round is a tie.

But the big difference between the 403(b) and the 457(b) with investment options is that the employer tends to provide employees with more vendor options for a 403(b) compared to a 457(b). 

While having more options doesn’t always lead to better investment options, it may be more likely to do so. 

That’s why this round goes to the 403(b).

Round 2 Winner: 403(b)

Round 3: When You Can Withdraw Your Money

Imagine not being able to get access to the money in your retirement account when you want to. 

That’s why it’s important to compare when you are allowed to access money in your 403(b) and 457(b) and under what conditions you may do so.

403(b)

The IRS stipulates that you must be at least 59 ½ years old to start withdrawing money from your 403(b). If you withdraw money before reaching this age, you can get hit with a 10% penalty.

There are exceptions to this rule, however. 

The first of these is “The Rule of 55,” which allows you to withdraw money from your 403(b) without incurring the 10% penalty if you are least 55 years old and you leave your job.

You can also withdraw money from your 403(b) if you become disabled or need to pay for medical expenses that are more than 7.5% of your adjusted gross income. 

457(b)

You can withdraw money from your 457(b) right after you stop working for your employer, and you won’t incur a penalty. 

If you want to withdraw money while you continue working, you must demonstrate an unforeseen financial hardship. 

Who Wins This Round?

This round goes to the 457(b) – the ability to withdraw money at any age without being hit with a penalty as long as you leave your job can be huge, especially if you are hoping to retire at a younger age. 

Don’t completely disregard the “Rule of 55,” though. If you leave your job, you can access the money in your 403(b) at only 55 years of age, which can still help you retire much younger than many of your peers.

Round 3 Winner: 457(b)

Round 4: Contribution Amounts

The amount of money that can be contributed to a retirement plan is very important since that can lead to greater investment gains and, thereby, a larger nest egg.

403(b) Employee Contribution

For year 2023, you can make an employee contribution of up to $22,500. However, if you make less than this, then your salary will be the maximum amount that you can contribute.

403(b) Employer Contribution

The maximum total contribution that can be made to a 403(b) in 2023 is $66,000. Since the maximum employee contribution in 2023 is $22,500, that leaves a maximum employer contribution of $43,500 in year 2023.

457(b) Employee And Employer Contribution

Just like we covered with the 403(b) plan, you are allowed to make an employee contribution of up to $22,500 in year 2023. However, if you make less than that, your salary will be the maximum amount that you can contribute.

Here’s where the 403(b) and the 457(b) differ: The employee contribution and the employer contribution for the 457(b) come from the same bucket.

For example, if your annual limit in 2023 is $22,500 and you contribute this full amount to your 457(b), then your employer cannot contribute anything to your 457(b) plan because you’ve already hit the combined $22,500 employee and employer contribution limit for that year.

As another example, if you contributed $20,000 to your 457(b) in 2023, then your employer can contribute up to $2,500 as doing so would hit the combined employee and employer contribution limit of $22,500 for year 2023.

Who Wins This Round?

The contribution limit for a 457(b) includes both the employee contribution and the employer contribution while the 403(b) has separate contribution limits for the employee contribution and the employee contribution.

Contribution Limits Chart

While this may seem to provide an opportunity to get more money into a 403(b), the unfortunate reality is that employers often don’t contribute anything to either a 403(b) or a 457(b).

Therefore, it will likely be up to you to contribute whatever dollar amount you would like to have deposited into either your 403(b) or your 457(b), effectively making the advantage of the 403(b)’s separate contribution limits moot.

So, unless your employer is willing to make a contribution of any amount to your 403(b), I’m calling this round a draw.

Round 4 Winner: Tie

Round 5: Catch-Up Contributions

After comparing the annual contribution limits for a 403(b) and a 457(b), I would be remiss if we did not also cover their catch-up contribution opportunities.

Catch-up contributions can allow you to place even more money in either of these accounts, effectively raising the annual contribution limit by the catch-up contribution amount for that year. You must meet certain provisions to qualify to make a catch-up contribution, though.

Here is an overview of the catch-up contribution opportunities you have access to with either a 403(b), a 457(b), or both. 

The More Than 50 Years Old Catch-Up Contribution

If you are older than 50 years of age, you can contribute up to an additional $7,500 in 2023. 

This opportunity is available for both the 403(b) and the 457(b) governmental plans. 

You cannot make this catch-up contribution to a 457(b) non-governmental plan, though.

15 Year Rule Catch-Up Contribution

This catch-up contribution opportunity is available for a 403(b) plan but not a 457(b) plan.

If you have worked for your employer for at least 15 years and your average annual contribution was less than $5,000, then the IRS allows you to make catch-up contributions of up to $3,000 per year for as much as a total of $15,000 overall. 

Unfortunately, though, not all employers will provide you with this catch-up contribution opportunity.

On the plus side, if you qualify for both the 50 Years Old Catch-Up Contribution and the 15 Year Rule Catch-Up Contribution and your employer does allow you to make the 15 Year Rule Catch-Up Contribution, you can make both catch-up contributions – you do not have to pick doing one or the other.

3 Year Rule Catch-Up Contribution

This catch-up contribution opportunity is available for a 457(b) plan but not a 403(b) plan.

To qualify for this catch-up contribution, you must be within 3 years of Normal Retirement Age. If you are, then you can contribute the lesser of either twice the annual contribution limit for that year or the annual contribution limit plus the amount of contributions you didn’t make up to the annual allowable contribution limit from all previous years you had a 457(b) – check out the article on the 457(b) plan for details on how this work. 

Unfortunately, not all employers will provide you with this catch-up contribution opportunity.

Even if your employer does provide you with the opportunity to make this catch-up contribution, the IRS won’t let you do both the 50 Years Old Catch-Up Contribution and the 3 Year Rule Catch-Up Contribution to your 457(b) plan. 

Who Wins This Round?

Both the 403(b) and the 457(b) have 2 catch-up contribution opportunities.

The 50 Years Old Catch-Up Contribution can be used for both the 403(b) and the governmental 457(b) plans. Although you cannot make this catch-up contribution to your 457(b) if it is a non-governmental 457(b) plan, most physical therapists and occupational therapists who have a 457(b) will have a governmental-type plan so this is likely not an issue for you.

Both the 15 Year Rule Catch-Up Contribution option for your 403(b) plan and the 3 Year Rule Catch-Up Contribution for your 457(b) plan are not guaranteed to be offered by your employer, so getting access to either of these is essentially a wash. But if your employer only offers one of these opportunities and not the other, then this round goes to the plan which your employer is offering the additional catch-up contribution opportunity.

Assuming your employer does give you access to all catch-up contribution opportunities, it may seem like the 403(b) plan has the advantage of allowing you to contribute more because you can make both the 50 Years Old Catch-Up Contribution and the 15 Year Rule Catch-Up Contribution while you have to choose between making either the 50 Years Old Catch-Up Contribution and the 3 Year Rule Catch-Up Contribution to your 457(b) plan.

However, the catch-up contribution amount that can be made to your 457(b) plan using just the 3 Year Rule Catch-Up Contribution can still be much more than the total amount of doing both the 50 Years Old Catch-Up Contribution and the 15 Year Rule Catch-Up Contribution to your 403(b) if you didn’t much contribute earlier on to your 457(b) plan. 

So we’ll say that the 457(b) plan edges out the 403(b) plan this round, but if your employer offers the 15 Year Rule Catch-Up Contribution option for your 403(b) plan and not the 3 Year Rule Catch-Up Contribution for your 457(b) plan, then that would change this round’s winner.

Round 5 Winner: 457(b)

Round 6: Roth Option

The concept of making pre-tax contributions, referred to as Roth contributions, was covered in each of the 403(b) article and the 457(b) article so be sure to refer back to those as needed.

Not every retirement plan offers the opportunity to make Roth contributions, so it’s important to consider when comparing the 403(b) plan to the 457(b) plan.

403(b)

The IRS does allow Roth contributions to be made to a 403(b) plan.

However, not all employers provide the opportunity to make Roth contributions to a 403(b). 

457(b)

The IRS does allow Roth contributions to be made to a governmental 457(b) plan. If your 457(b) plan is non-governmental, then the IRS does not allow you to make Roth contributions. 

However, even if you have a governmental 457(b) plan, not all employers provide the opportunity to make Roth contributions to it. 

Who Wins This Round?

It really depends on if your employer offers you the opportunity to make Roth contributions to either plan. If they don’t, then you can’t make Roth contributions to the plan even though the IRS allows it.

My wife has access to both a 403(b) and a 457(b) through her job as an occupational therapist, and from what I’ve seen it appears that employers are much more likely to offer the Roth option for the 403(b) plan than the 457(b) plan.

That’s why I am giving this round to the 403(b) plan, but if you lucked out and your employer happens to offer the Roth option for both plans then consider this round a tie.

Round 6 Winner: 403(b)

Round 7: Rollovers

When we think about getting money out of a retirement account, the first thought that typically comes to mind is doing so by making a withdrawal. 

But what if you simply want to move the money from either your 403(b) or your 457(b) to another retirement account?

403(b)

You can rollover your 403(b) balance to another 403(b) plan, a 401(k), a 457(b), or an IRA.

457(b)

The types of accounts that you are allowed to rollover your 457(b) balance to depends on if your 457(b) plan is governmental or non-governmental. 

1. Governmental 457(b) Plan

A governmental 457(b) plan can be rolled over into another governmental 457(b) plan, a 401(k), a 403(b), or an IRA.

2. Non-Governmental 457(b) Plan

A non-governmental 457(b) plan can only be rolled over into another non-governmental 457(b) plan.

Who Wins This Round?

The 403(b) and the governmental 457(b) plans have the same rollover options, so I’m calling this round a tie.

But if you have a non-governmental 457(b) plan then you are very limited with your rollover options and this round would go to the 403(b).

Round 7 Winner: Tie

Round 8: Loan Option

Although I would only use this option as a last resort, the ability to take a loan on your retirement account balance can be helpful in certain circumstances.

Let’s see how the 403(b) and the 457(b) plans compare in this final round.

403(b)

You are allowed to take out a loan on your 403(b). The loan cannot be for more than $50,000 or more than 50% of your 403(b) balance, whichever is less, and you must make quarterly payments to repay the loan in a 5-year period. 

Not all vendors will allow you to take out a loan, though, so check with your vendor before doing so.

457(b)

You are allowed to take out a loan on your 457(b). The loan cannot be for more than $50,000 or more than 50% of your 457(b) balance, whichever is less, and you must make quarterly payments to repay the loan in a 5-year period. 

Not all vendors will allow you to take out a loan, though, so check with your vendor before doing so.

Who Wins This Round?

Both the 403(b) and the 457(b) have the same rules to follow when taking out a loan.

This last round is a tie.

Round 7 Winner: Tie

Final Thoughts. . .

This turned out to be a close match, but the 403(b) plan edged out the 457(b) plan just barely. 

Here’s the final tally on the scorecard for a quick overview:

Score Card

Now, while the scorecard gives you a quick overview on how these two plans compare, don’t let it oversimplify each plan’s attributes to a basic “good or bad” because these results can quickly change based on your own personal situation.

For example, when we covered “Who Owns The Account Balance”, the 403(b) won that round. However, a governmental 457(b) plan should still be considered a very good, low risk option in this regard.

And when considering Contribution Amounts, the round was declared a tie. However, if your employer is willing to contribute any amount to your 403(b) plan, then the 403(b) would win this round.  

Likewise, the round that discussed rollover options was deemed a tie, but if you have a non-governmental 457(b) then that round would go to the 403(b).

Another important point to make is that each round discussed was worth the same. But you may personally feel that one of these rounds is more important while another round may be less important. 

For example, maybe you are looking to retire at a very young age. The ability to get access to your 457(b) balance at any age when leaving your job can be huge.

Be sure to assess each plan’s characteristics according to your own personal situation to better ensure you make the right decision for yourself when deciding to prioritize one of these retirement accounts over the other.

Do you have access to both a 403(b) and a 457(b)? Do you invest more money in one or the other? Why or why not? Share your thoughts in the comments section below!

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