Are you a public sector employee looking to ramp up your retirement savings? 403(b) and 457 plans offer substantial tax benefits and contribution limits to help you generate retirement wealth. These plans, available through non-profits, schools, churches, and government agencies, let you sock away tens of thousands of dollars each year for the future. You can choose from investment options like mutual funds, annuities, and often ETFs to tailor an strategy matching your financial goals. And some plans provide employer matching, giving you free money to help your balance grow even faster.
If your retirement savings are behind schedule, catch-up provisions allow those 50 and over to contribute thousands more each year to make up ground. For the highly compensated, 457(f) plans pose risks but give you the potential to shelter huge portions of your income for retirement.
Whether new to the workforce or nearing retirement, 403(b) and 457 plans offer features to help you save what you need for your future. This guide provides an overview of how these plans work, their benefits and options, and ways to maximize your contributions so you can make the most of these tax-advantaged retirement accounts.
The time to save is now – don’t delay another day building your retirement wealth and security.
How 403(b) and 457 Plans Work
Work for a non-profit, public school, church, or government agency? 403(b) and 457 plans allow you to save for retirement directly from your paycheck with tax benefits.
Contributions to these plans are excluded from taxable income, so they provide an immediate tax benefit. But the contributions themselves are subject to FICA taxes.
With 403(b) and 457 plans, you specify a percentage of your salary to contribute per pay period. This lowers your taxable income for the year while allowing your money to build tax-free until retirement. At retirement, withdrawals are taxed as ordinary income. Some employers match a portion of your contributions, which enhances your retirement savings.
Benefits of 403(b) and 457 Plans
Two significant benefits of these plans are tax advantages and potential employer matches. Contributing pre-tax money lowers your tax burden now. And tax-deferred growth allows your money to compound over time. If your employer provides matching, take full advantage of it. Their contributions significantly boost your retirement savings.
Tax advantaged retirement planning, 403(b) and 457 plans offer benefits like:
- Pre-tax contributions: Lower your taxable income now by contributing pre-tax dollars. Roth options are after-tax but withdrawals are tax free.
- Tax-deferred growth: Investments grow tax deferred for potentially decades. Pay taxes at withdrawal at your income tax rate at that time.
- Employer matching: Some employers match a percentage of your contributions, providing free money to increase your retirement balance exponentially over time through compounding.
- Higher limits: For 2023, you can contribute up to $22,500 per year to a 403(b) or 457 plan, or $30,000 if over 50. More than IRAs allow.
- Investment options: Choose from annuities, mutual funds, ETFs, and sometimes stocks and bonds based on your goals and risk appetite.
- Roth options: Some plans allow after-tax Roth contributions for tax-free qualified withdrawals in retirement. Check if available and if right for your needs.
- Loans and hardship withdrawals: Some plans permit borrowing a portion of your balance or withdrawing for financial hardship. Fees and taxes typically apply.
- Rollovers accepted: You may be able to roll other pre-tax retirement funds like Traditional IRA or 401(k) balances into your 403(b) or 457 plan. Check plan rules first.
Choosing a Provider for Your Plan
Your employer selects companies you can invest with in these plans. Compare providers and their investment options and fees to choose one suited to your needs. Lower fees mean more of your money stays invested for the future.
Maximizing Your Contributions
In 2023, you can contribute up to $22,500 annually to 403(b) and 457 plans, or $30,000 if 50 or older. Contribute as much as possible, especially if your employer matches a portion. But be aware of any limits they may place on their matching amount.
- $22,500 to a 403(b) or 457 plan, or $30,000 if over 50.
- Roth 403(b) has the same limits. Contributions are after-tax but potentially tax-free in retirement.
- If you have both a 401(k) and 403(b), contribute the maximum to both.
- Watch out for contribution limits for highly compensated employees. Your contributions may be restricted if you earn over $200,000 per year.
Diverse Investment Options
These plans typically offer mutual funds, annuities, stocks, bonds, and CDs. Work with a financial advisor to craft an investment strategy aligned with your financial goals. They can help you choose options with the best potential returns for your risk tolerance.
•Fixed and variable annuities: Provide guarantees but higher fees. Offer a simple way to generate lifetime income.
•Mutual funds: Hold bonds, stocks or a mix. Returns depend on the markets but fees are often lower than annuities.
•Some plans offer ETFs, managed accounts, and brokerage access for those wanting more control and flexibility.
The key is choosing a mix of investments that balances your financial objectives, risk tolerance, and time horizon. Annuities guarantee returns and lifetime income but charge higher fees, reducing your long term returns. Compare all available options, then decide how much to allocate to each. And review your choices periodically to ensure your money is working as hard as possible for you in a way that fits your needs.
Understanding Fees and Keeping Costs Low
Compare fees for investment options and providers as they impact your returns. Lower fees mean more of your money stays invested to grow your retirement savings. Ask about other costs too, like charges to transfer money between investments or providers to avoid surprises.
Catch-Up Contributions for Employees Nearing Retirement
403(b) and 457 plans allow ‘catch-up’ contributions above the standard limits for those nearing retirement age with limited savings. For 2023, if you are:
- Age 50 or older, contribute an extra $6,500 to your 403(b) or 457 plan for a total of $30,000.
- In the last 3 taxable years before any age from 60 to 70 1/2 chosen by the participant (the “normal” retirement age in a government 457(b) plan), you can defer up to twice the annual contribution limit, or $30,000. Contributions this year would be limited to $37,500 if retiring at age 70.
- A long-tenured employee in a 403(b) plan, you may qualify for up to $15,000 per year in special catch-up contributions if employed at least 15 years with the same organization and contributed less than $5,000 on average to any available 403(b) plans annually over those years.
Catch-up contributions provide a way to ramp up your saving efforts as retirement nears if you have limited savings so far. Be sure to check with your plan administrator to determine if you qualify and take advantage of any opportunities to maximize your contributions this year.
457(f) Plans for Select Government and Non-Profit Employees
Some government and tax-exempt organizations offer 457(f) plans allowing larger catch-up contributions three years before retirement. But these extra contributions must stay in the plan until retirement and face withdrawal restrictions.
Deferred compensation plans for state and local governments, 457(f) plans allow public employees to shelter substantial income for retirement. Key differences from 457(b) plans include:
- No contribution limits: Defer as much compensation as you want each year. Deferrals over $100,000 require approval.
- Substantial risk of forfeiture: You must remain employed for a set period like 2 years to qualify for the deferred compensation benefits. Leaving earlier means losing benefits.
- Must designate beneficiaries: Assets become payable to beneficiaries upon your death. You cannot access funds during your lifetime.
- Deferrals are taxed upfront: The compensation you defer is included as taxable income for the year earned. No tax benefit until distributions in retirement.
457(f) plans provide retirement income for those planning to work many years for the same government agency. The ability to defer substantial compensation with tax benefits, despite the risks and restrictions, can generate substantial retirement wealth over time. But these plans are most beneficial when using a long time horizon and maximizing contributions as early and as much as possible.
In Summary
As a public sector employee, you have access to valuable retirement savings plans most people can only dream of. Between your 403(b) and 457 options, you can shovel tens of thousands of dollars each year into tax-advantaged accounts to generate wealth for your future. Max out these plans if at all possible. Contribute enough to get any matching offered, then add more whenever you’re able. The tax benefits alone make these plans a no-brainer.
Time is one resource you can’t get back. Whether retirement feels imminent or decades away, start saving aggressively today. Defer as much as these plans allow, choose solid investments suited to your needs, and keep fees low so more of your money works for you. Review your approach regularly and make changes to ensure the strongest returns.
Catch-up provisions give those closer to retirement a chance to reach their goals before time runs out. Older employees, check if you qualify and take advantage. For the well-compensated eyeing early retirement, 457(f) plans could shelter hundreds of thousands of tax-free dollars if you remain dedicated to your job. But go in with eyes open to the risks.
Public service may not make you rich, but these retirement plans provide a way to build wealth and security for the future. You have options most workers don’t. Seize this opportunity and never look back. Commit to funding your future through consistent saving and prudent investing. Someday, you’ll have the means to walk away from work confident the next chapter of life will be one of possibilities rather than hardship. Your dedication now ensures freedom and stability to come. The future is yours to shape.
