A 401(k) plan and a 457 plan are both retirement savings plans offered by employers to help employees save for retirement. They both offer tax advantages, but there are some key differences to note. 401(k) plans are more common and are offered by both public and private employers. 457 plans are more specific and are only offered by governmental employers, including federal, state, and local governments. They both have contribution limits, but the limits are different. 401(k) plans have a higher contribution limit than 457 plans. 401(k) plans also have a wider variety of investment options to choose from. 457 plans typically have fewer fees associated with them.
Tax-Advantaged Retirement Accounts
Retirement planning is a crucial aspect of financial well-being. 401k and 457 plans are two types of tax-advantaged retirement accounts that offer numerous benefits to savers. Both plans allow individuals to save for retirement on a pre-tax basis, reducing their current taxable income.
Contribution Limits
- 401k Plan: The maximum annual contribution limit for 401k plans in 2023 is $22,500 ($30,000 for individuals age 50 or older).
- 457 Plan: The annual contribution limit for 457 plans is significantly higher. In 2023, the limit is $23,500 ($32,500 for individuals age 50 or older).
Eligibility
- 401k Plan: 401k plans are offered by employers as part of their employee benefit packages. To be eligible, individuals must be employed by an organization that offers the plan.
- 457 Plan: 457 plans are available to employees of state and local governments, as well as certain non-profit organizations. They are not offered by private-sector employers.
Withdrawal Rules
- 401k Plan: Withdrawals from 401k plans before age 59½ may be subject to a 10% early withdrawal penalty. However, there are exceptions to this rule, such as withdrawals for qualified expenses like medical expenses or education costs.
- 457 Plan: Withdrawals from 457 plans are generally not subject to early withdrawal penalties if the individual separates from service with the employer. However, withdrawals before age 59½ may be taxed as ordinary income.
Investment Options
- 401k Plan: 401k plans typically offer a range of investment options, including stocks, bonds, and mutual funds. The specific investment options available may vary depending on the plan’s provider.
- 457 Plan: 457 plans often have more conservative investment options compared to 401k plans. This is because 457 plans are primarily intended for public sector employees who may have more stable employment and retirement benefits.
Other Key Differences
| Feature | 401k Plan | 457 Plan |
|---|---|---|
| Roth Option | Yes | No |
| Loan Availability | Yes, subject to plan rules | No |
| Required Minimum Distribution Age | 72 | 70½ |
401(k) vs. 457 Plan: Eligibility and Contribution Limits
401(k) and 457 plans are two popular retirement savings plans that offer tax benefits to participants. Both plans allow employees to contribute pre-tax dollars to a tax-deferred account. The main difference between the two plans is that 401(k) plans are available to employees of for-profit organizations, while 457 plans are available to employees of state and local governments and certain non-profit organizations. Non-government employees can also contribute to a 457 (f) plan if their employer chooses to adopt this specific type of plan.
Eligibility and Contribution Limits
The eligibility and contribution limits for 401(k) and 457 plans are slightly different. The following is a summary of the key differences:
- Eligibility: 401(k) plans are available to employees of for-profit organizations. 457 plans are available to employees of state and local governments and certain non-profit organizations. Non-government employees can also contribute to a 457 (f) plan if their employer chooses to adopt this specific type of plan.
- Contribution limits: For 2023, the contribution limit for 401(k) plans is $22,500 for employees under age 50 and $30,000 for employees age 50 or older. The contribution limit for 457 plans is $23,500 for employees under age 50 and $35,000 for employees age 50 or older. In addition, employers may make matching contributions to 401(k) plans, up to the same limit as the employee’s contribution. Employers cannot make matching contributions to 457 plans.
- Vesting: Vesting refers to the percentage of retirement savings that an employee has the right to keep, even if they leave their job. 401(k) plans have different vesting rules than 457 plans. Under the current law, 401(k) plans must vest 100% of employer contributions after three years of service. 457 plans have no vesting requirements.
- Taxes: Withdrawals from 401(k) and 457 plans are taxed as ordinary income. However, there are no early withdrawal penalties for 457 plans, while there are for 401(k) plans.
Which Plan Is Right For You?
The best retirement plan for you depends on your individual circumstances. If you are employed by a for-profit organization, you should consider a 401(k) plan. If you are employed by a state or local government or certain non-profit organizations, you should consider a 457 plan. Non-government employees can also contribute to a 457 (f) plan if their employer chooses to adopt this specific type of plan.
| Feature | 401(k) Plan | 457 Plan |
| — | — | — |
| Eligibility | Employees of for-profit organizations | Employees of state and local governments and certain non-profit organizations |
| Contribution limits | $22,500 for employees under age 50 and $30,000 for employees age 50 or older | $23,500 for employees under age 50 and $35,000 for employees age 50 or older |
| Vesting | 100% of employer contributions after three years of service | No vesting requirements |
| Taxes | Withdrawals are taxed as ordinary income | Withdrawals are taxed as ordinary income |
| Early withdrawal penalty | 10% early withdrawal penalty | No early withdrawal penalty |
401k vs. 457 Plan: Key Differences
401k and 457 plans are both retirement savings plans offered by employers. While they share some similarities, there are also some key differences between the two.
Contribution Limits
One of the main differences between 401k and 457 plans is the annual contribution limits. For 2023, the contribution limit for 401k plans is $22,500 ($30,000 for individuals age 50 and older). The contribution limit for 457 plans is $23,500 ($31,500 for individuals age 50 and older).
Eligibility
401k plans are available to employees of for-profit companies. 457 plans are available to employees of government entities and certain non-profit organizations.
Withdrawal Rules
401k plans allow participants to withdraw funds after they reach age 59½ without paying a penalty. However, there is a 10% early withdrawal penalty for withdrawals made before age 59½. 457 plans allow participants to withdraw funds without paying a penalty after they separate from service from their employer. However, there is a 10% early withdrawal penalty for withdrawals made before age 59½ unless the funds are used to purchase health insurance or to pay for qualified education expenses.
Investment Options
| Investment Option | 401k Plan | 457 Plan |
|---|---|---|
| Mutual Funds | Yes | Yes |
| Exchange-Traded Funds (ETFs) | Yes | Yes |
| Stocks | Yes | Yes |
| Bonds | Yes | Yes |
| Target-Date Funds | Yes | Yes |
| Stable Value Funds | Yes | Yes |
| Self-Directed Investments | No | Yes |
401k and 457 plans offer a wide range of investment options. These options allow participants to tailor their investments to meet their individual needs and risk tolerance.
Conclusion
401k and 457 plans are both excellent retirement savings options. Both plans offer tax-deferred growth, which can help participants save more for their retirement. However, there are some key differences between the two plans that participants should be aware of before making a decision about which plan to invest in.
401k vs. 457 Plan
401k and 457 plans are both employer-sponsored retirement plans that offer tax advantages. Both plans allow you to invest pre-tax dollars, reducing your current taxable income. The earnings on your investments grow tax-deferred, and you only pay taxes when you withdraw the money in retirement.
There are a few key differences between 401k and 457 plans:
- Eligibility: 401k plans are available to employees of for-profit companies. 457 plans are available to employees of state and local governments, as well as some non-profit organizations.
- Contribution limits: The contribution limits for 401k plans are higher than the contribution limits for 457 plans. For 2023, the contribution limit for 401k plans is $22,500 ($30,000 if you’re age 50 or older). The contribution limit for 457 plans is $22,500.
- Catch-up contributions: Employees who are age 50 or older can make catch-up contributions to 401k plans. Catch-up contributions are not allowed for 457 plans.
- Investment options: 401k plans typically offer a wider range of investment options than 457 plans.
- Early withdrawal penalties: Early withdrawals from 401k plans are subject to a 10% penalty tax, plus income taxes. Early withdrawals from 457 plans are not subject to a penalty tax
| Feature | 401k Plan | 457 Plan |
|---|---|---|
| Eligibility | Employees of for-profit companies | Employees of state and local governments, as well as some non-profit organizations |
| Contribution limits | $22,500 ($30,000 if age 50 or older) | $22,500 |
| Catch-up contributions | Allowed for employees age 50 or older | Not allowed |
| Investment options | Wider range of investment options | More limited investment options |
| Early withdrawal penalties | 10% penalty tax, plus income taxes | No penalty tax |
Well folks, that’s about all I got for you today on the topic of 401(k)s and 457 plans. I’m sure you’ve got a lot to think about, but I hope this article has helped you gain a better understanding of the differences between these two retirement savings plans. As always, be sure to do your own research and talk to a financial advisor if you have any specific questions. Thanks for reading, and I’ll catch you next time!