457(b) vs. 401(k): Which Should You Choose?

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Both 401(k) plans and a 457(b) plans are retirement accounts that can help you save money to fund your golden years. A 401(k) plan can be offered by any employer, but a 457(b) plan is offered mostly by state and local governments to their workers. It's key to know how these accounts work before you start saving with one or both of them.

457(b) vs. 401(k) Plans

457(b) Plans	401(k) Plans
Offered by state and local governments to their workers.	May be offered by any employer.
Contribution limit is the lesser of 100% of employee's includable pay, or $19,500 for 2021 ($20,500 for 2022).	Salary deferral limit was $19,500 for 2021 ($20,500 for 2022).
No early withdrawal penalty.	10% penalty applies on early withdrawals.

Eligibility Factors

Certain nonprofit employers can offer 457(b) plans, but they're mostly offered to government workers. Some large government employers offer both 401(k) and 457(b) plans and let their workers save to both. This gives them a chance to save twice as much.

Government employees include officials at the state or local level, public school teachers, county and city workers, law enforcement, and first responders. Nonprofit and for-profit companies, as well as some government bodies that began the plans before May 6, 1986, may offer 401(k) plans.

The Employee Retirement Income Security Act of 1974 (ERISA) doesn't cover 457(b) plans, but it covers 401(k) plans.

Plan Limits

The salary deferral limit is how much of your pre-tax pay you can divert to a 401(k) plan. The limit is $20,500 for 2022, up from $19,500 for 2021. You can also make catch-up contributions of up to $6,500 if you are age 50 or older and the plan permits it.

The limit for all savings to 457(b) plans is the lesser of 100% of the worker's includable pay or the elective deferral limit. The elective deferral limit for 457(b) plans is also $20,500 for 2022 and $19,500 for 2021.

Your plan may permit special 457(b) catch-up contributions for additional savings during the three years before your normal retirement age as stated in the plan. You can save the lesser of twice the limit—$41,000 in 2022, $39,000 in 2021—or the basic limit per year, plus any amount of the basic limit that you didn't use in prior years. If your plan permits both the special 457(b) catch-up and the age-50 catch-up, you may use the larger allowed deferral, but not both.

Note

The IRS allows you to save to both a 401(k) and 457(b) plan at the same time, because a 457(b) plan is a nonqualified plan.

Early-Withdrawal Penalties

Saving to both types of plans allows you to double your tax-deferred savings and reduce the income on which you're taxed. Having both types of accounts can be helpful if you need to withdraw money, because there are no early-withdrawal penalties on a governmental 457(b) plan.

You won't pay taxes on any tax-deferred retirement savings as long as the money remains in the account, but you must pay income taxes on the withdrawals from a traditional 401(k) account. You also can be subject to a 10% early-withdrawal penalty on top of any income tax if you make a withdrawal before age 59 1/2.

Note

You'll pay income tax on withdrawals from a 457(b) plan, but these plans aren't subject to the early-withdrawal penalty, so you won't be hit with that extra 10% fee.

You can withdraw the excess from your 401(k) plan up until the tax filing deadline, which is April 15 in most years, if you're not yet age 59 1/2 and you realize that you've gone over your limit. The amount still counts toward your gross income for that year, but you'll be spared the penalty.

Special Considerations

Employers that fund 401(k) plans often match a portion of the savings made by their workers. They can do this up to the limit, which is the lesser of 100% of a worker's pay or $58,000 for 2021 or $61,000 for 2022. This limit includes both the worker's and the employer's contributions combined.

Note

For example, in 2021, you could save $19,500, and your employer could contribute $38,500 for total savings of $58,000.

One catch with a 457(b) plan is that it's not common for the government to offer a match. It treats 457(b) plans as "extra" savings plans, because many state and local workers are also eligible for pensions.

Which Is Right for You?

Saving to both types of plans—and how much you save to each—can depend on your age. You can tap into a 457(b) plan before age 59 1/2 without a tax penalty, so this might be the focus of your savings when you're young. You can get to the money if you need it before you stop working.

You might want to save to a 401(k) instead if you're nearing retirement age and your employer offers matching savings. You can take full advantage of your working years and accept that free money received from your job as the clock ticks down.

It can depend on your personal circumstances, so seek the advice of a financial advisor if you're at all unsure. Tax laws and rules change often, so always consult an expert before making a big decision.

Frequently Asked Questions (FAQs)

How much should I contribute to my 401(k) or 457(b)?

When it comes to how much you should save in a retirement plan every year, a commonly cited minimum is between 10% and 15% of your income. Others say the minimum amount should be whatever maximizes your employer's contribution. In reality, this is a highly personal question that depends on your lifestyle and goals. It's best to work with a financial advisor who can answer specific questions with specific dollar figures that are relevant to your life.

What happens to your 401(k) when you quit?

You have options when it comes to an old 401(k) after quitting a job. Depending on the plan, you may be able to keep your old 401(k) exactly as it is. You may also have the option to roll your 401(k) funds over into a new 401(k) at your new job. You will always have the option of rolling your old 401(k) funds over into a rollover IRA, but unlike with a 401(k), you will have to manage your investments if you use an IRA.

What is the difference between a 457(b) and a 403(b)?

The 403(b) and 457(b) plans are both tax-deferred retirement savings accounts that cover nonprofit entities like governments, churches, and charities. Certain employers may offer both types of plans. They differ in that 403(b) withdrawal rules are more like 401(k) withdrawals; you'll pay a penalty tax if you withdraw funds before reaching age 59 1/2.

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