401(k) and 457 plans are both employer-sponsored retirement savings plans that offer tax benefits. They’re similar in many ways, but there are some key differences.
– **Eligibility:** 401(k) plans are available to employees of both for-profit and non-profit organizations. 457 plans are only available to employees of state and local governments, and non-profit organizations that do not receive federal funding.
– **Contribution limits:** The annual contribution limit for 401(k) plans is $20,500 for 2023 ($27,000 for those age 50 or older). The annual contribution limit for 457 plans is $22,500 for 2023 ($30,000 for those age 50 or older).
– **Tax treatment:** Contributions to both 401(k) and 457 plans are made pre-tax, which reduces your taxable income. Earnings on investments in both plans grow tax-free until you withdraw them, at which point they are taxed as ordinary income.
– **Withdrawals:** You can withdraw funds from a 401(k) plan after you reach age 59½ without paying a penalty. However, you will have to pay income tax on the amount you withdraw. You can withdraw funds from a 457 plan at any time without paying a penalty, but you may have to pay income tax on the amount you withdraw.
Features of 401(k) Plans
- Employer-sponsored retirement savings plan
- Contributions made on a pre-tax basis, reducing current taxable income
- Employer may match a portion of employee contributions
- Investment options typically include mutual funds, stocks, and bonds
- Withdrawals are generally subject to ordinary income tax and a 10% early withdrawal penalty if taken before age 59½
- Annual contribution limits set by the IRS
- Roth 401(k) option available, allowing for tax-free withdrawals in retirement
401(k) vs. 457 Plans
457 plans are employer-sponsored retirement plans similar to 401(k) plans, but with some key differences:
| Feature | 401(k) Plan | 457 Plan |
|---|---|---|
| Eligibility | Private-sector employers | Governmental and non-profit organizations |
| Contribution Limits | Set by the IRS annually | Annual limit for 2023: $22,500 (plus an additional $7,500 catch-up contribution for individuals age 50 and older) |
| Employer Contributions | Employer matching contributions may be available | Employer contributions are not typically offered |
| Investment Options | Similar to 401(k) plans | Investment options may be more limited |
| Withdrawals | Generally subject to ordinary income tax and a 10% early withdrawal penalty | May allow for penalty-free withdrawals before age 59½ in certain circumstances |
| Plan Availability | Widely available through private-sector employers | Limited to governmental and non-profit organizations |
401k vs. 457 Plans
401k and 457 plans are both tax-advantaged retirement savings accounts offered by employers. While they share some similarities, such as contributions being tax-deductible and earnings growing tax-free, there are also some key differences between the two plans.
Eligibility for 457 Plans
457 plans are specifically designed for employees of state and local governments, as well as certain tax- exempt organizations. Unlike 401k plans, which are available to both for-profit and non-profit organizations, 457 plans are only available to eligible government and non-profit employers.
Within the group of eligible employers, 457 plans can be further divided into two types:
- Traditional 457 Plans: These plans are only available to employees of state and local governments.
- Roth 457 Plans: These plans are available to employees of both state and local governments, as well as eligible tax- exempt organizations.
The following table compares some of the key features of 401k and 457 plans:
| Feature | 401k Plans | 457 Plans |
|---|---|---|
| Eligibility | Available to employees of both for-profit and non-profit organizations | Available only to employees of state and local governments, as well as certain tax- exempt organizations |
| Types | Traditional 401k, Roth 401k | Traditional 457 Plan, Roth 457 Plan |
| Employer Contributions | May be available | May be available, but only from state or local governments (not tax- exempt organizations) |
| Catch-Up Contributions | Available to participants age 50 or older | Not available |
| Withdrawal Options | Subject to income tax and early withdrawal penalties | May be subject to income tax and early withdrawal penalties, but may also be eligible for tax-free withdrawals |
401k vs. 457: Contribution Limits and Withdrawals
401(k) and 457 plans are both retirement savings accounts that offer tax benefits. However, there are some key differences between the two plans, including their contribution limits and withdrawal rules.
Contribution Limits
| Plan Type | Employee Contribution Limit (2023) | Employer Contribution Limit (2023) |
|---|---|---|
| 401(k) | $22,500 | $66,000 (or 100% of participant compensation, up to $305,000) |
| 457 | $22,500 | $66,000 (or 100% of participant compensation, up to $290,000) |
As you can see, the contribution limits for 401(k) and 457 plans are the same. However, the employer contribution limit for 457 plans is slightly lower than the limit for 401(k) plans.
Withdrawals
401(k) plans and 457 plans have different rules for withdrawals. 401(k) plans allow participants to withdraw funds after age 59½ without paying a penalty. However, 457 plans typically do not allow participants to withdraw funds until they retire or leave their employer. In some cases, participants may be able to take a hardship withdrawal from a 457 plan, but they will likely have to pay a penalty and taxes on the withdrawal.
In addition, 401(k) plans offer a Roth option. Roth 401(k) contributions are made with after-tax dollars, but withdrawals in retirement are tax-free. 457 plans do not offer a Roth option.
Here is a summary of the key differences between 401(k) and 457 plans:
- Contribution limits: The contribution limits for 401(k) and 457 plans are the same.
- Employer contribution limit: The employer contribution limit for 457 plans is slightly lower than the limit for 401(k) plans.
- Withdrawals: 401(k) plans allow participants to withdraw funds after age 59½ without paying a penalty. 457 plans typically do not allow participants to withdraw funds until they retire or leave their employer.
- Roth option: 401(k) plans offer a Roth option. 457 plans do not offer a Roth option.
Tax Implications
401(k) plans and 457 plans are both tax-advantaged retirement plans. However, there are some key differences between the two plans in terms of how they are taxed.
401(k) Plans
- 401(k) contributions are made on a pre-tax basis, reducing your taxable income for the current year.
- Earnings in a 401(k) plan grow tax-free until you withdraw them in retirement.
- Withdrawals from a 401(k) plan are taxed as ordinary income.
457 Plans
- 457 contributions are made on a post-tax basis, meaning you do not receive a tax deduction for the contributions you make.
- Earnings in a 457 plan grow tax-free until you withdraw them in retirement.
- Withdrawals from a 457 plan are taxed as ordinary income.
Retirement Benefits
Both 401(k) plans and 457 plans offer valuable retirement benefits. However, there are some key differences between the two plans in terms of the benefits they offer.
401(k) Plans
- 401(k) plans have higher contribution limits than 457 plans.
- 401(k) plans offer a wider range of investment options than 457 plans.
- 401(k) plans typically have lower fees than 457 plans.
457 Plans
- 457 plans are available to a wider range of employees than 401(k) plans.
- 457 plans offer more flexibility in terms of when you can make withdrawals.
- 457 plans may be a better option for employees who plan to retire in a high-tax bracket.
| Feature | 401(k) Plan | 457 Plan |
|---|---|---|
| Tax treatment of contributions | Pre-tax | Post-tax |
| Tax treatment of earnings | Tax-free | Tax-free |
| Tax treatment of withdrawals | Taxed as ordinary income | Taxed as ordinary income |
| Contribution limits | Higher | Lower |
| Investment options | Wider range | More limited |
| Fees | Typically lower | Typically higher |
| Availability | More limited | More widely available |
| Flexibility of withdrawals | More restrictive | More flexible |
Thanks for sticking with me through this quick dive into the world of 401(k)s and 457s. I hope you found this information helpful. If you have any more questions or want to learn more about personal finance, be sure to check back later. I’ll be here, ready to guide you on your financial journey. So, stay tuned, folks!