457 vs 401k: Which one is better?

<div><img width="1200" height="665" src="https://www.financebrokerage.com/wp-content/uploads/2024/01/Untitled-60.jpeg" class="attachment-post-thumbnail size-post-thumbnail wp-post-image" alt="457 vs 401k: Which one is better?" decoding="async" loading="lazy" /></div><h1><strong>457 vs 401k: Which One Is Better?</strong></h1>
<p><span data-preserver-spaces="true">A 457 plan and a 401(k) plan are both retirement savings vehicles in the United States, but they are designed for different types of employees and have some key differences. It isn’t surprising that people have many questions when it comes to 457 vs 401k.</span></p>
<p><span data-preserver-spaces="true">This comprehensive guide will explore the distinctions between these two plans, their advantages and disadvantages, and how to decide which one might be better for you. </span></p>
<p><strong>Key takeaways</strong></p>
<ul>
<li><span data-preserver-spaces="true">401(k) plans and 457 plans are both tax-advantaged retirement savings plans.</span></li>
<li><span data-preserver-spaces="true">401(k) plans are provided by private employers, catering to employees in the private sector.</span></li>
<li><span data-preserver-spaces="true">457 plans, on the other hand, are administered by state and local governments, as well as select nonprofit organizations.</span></li>
<li><span data-preserver-spaces="true">401(k) plans and 457 plans exhibit striking similarities. However, a significant distinction arises from the fact that 457 plans operate outside the purview of ERISA, leading to variations in the treatment of certain aspects.</span></li>
<li><span data-preserver-spaces="true">Notably, catch-up contributions, early withdrawals, and hardship distributions are subject to different rules and procedures within 457 plans.</span></li>
</ul>
<h2><strong>What is a 457(b) plan?</strong></h2>
<p><span data-preserver-spaces="true">A 457(b) plan is a retirement savings plan that is typically offered to employees of state and local governments, as well as some tax-exempt organizations, such as nonprofit hospitals and charities.</span></p>
<h2><strong>What is a 401(k) plan?</strong></h2>
<p><span data-preserver-spaces="true">A 401(k) plan is a widely known and used retirement savings plan offered by private sector employers. </span></p>
<p><span data-preserver-spaces="true">Employees can contribute a portion of their pre-tax salary to their 401(k) accounts, and employers often provide a matching contribution up to a certain percentage of the employee’s salary. Like 457(b) plans, 401(k) plans also offer tax advantages and various investment options.</span></p>
<h2><strong> 457 vs 401k (key differences)</strong></h2>
<p><span data-preserver-spaces="true"><img decoding="async" loading="lazy" class="alignnone size-full wp-image-258869" src="https://www.financebrokerage.com/wp-content/uploads/2024/02/Untitled-3-1.jpeg" alt=" 457 vs 401k (key differences)" width="1025" height="665" /></span></p>
<p><span data-preserver-spaces="true">Now that we’ve introduced both plans, let’s delve into the key differences between them:</span></p>
<h3><strong><span data-preserver-spaces="true">Eligibility</span></strong></h3>
<p><strong><span data-preserver-spaces="true">457(b) plans</span></strong><span data-preserver-spaces="true">: Typically available to employees of state and local governments and certain tax-exempt organizations.</span></p>
<p><strong><span data-preserver-spaces="true">401(k) plans</span></strong><span data-preserver-spaces="true">: Available to employees of private sector companies.</span></p>
<h3><strong><span data-preserver-spaces="true">Contribution limits</span></strong></h3>
<p><strong><span data-preserver-spaces="true">457(b) plans</span></strong><span data-preserver-spaces="true">: The annual maximum contribution limit in the case of 457 plans is $23,000 for 2024. For employees over the age of 50, the plans contain a catch-up provision that allows up to $7,500 in additional contributions in 2024. </span></p>
<p><span data-preserver-spaces="true">Contributions to each plan qualify the employee for a “saver’s tax credit.” It is possible to take loans from both 401(k) and 457 plans. </span></p>
<p><strong><span data-preserver-spaces="true">401(k) plans</span></strong><span data-preserver-spaces="true">: It is worth mentioning that 401(k) plans have an annual maximum contribution limit of $23,000 for 2024). For employees over the age of 50, the plans contain a catch-up provision that allows up to $7,500 in 2024. </span></p>
<h3><strong><span data-preserver-spaces="true">Employer match</span></strong></h3>
<p><strong><span data-preserver-spaces="true">457(b) plans</span></strong><span data-preserver-spaces="true">: Some governmental employers may offer a match, but it is less common than in 401(k) plans.</span></p>
<p><strong><span data-preserver-spaces="true">401(k) plans</span></strong><span data-preserver-spaces="true">: Many private sector employers offer a matching contribution, which can significantly boost your retirement savings. </span></p>
<h3><strong>Withdrawal penalties</strong></h3>
<p><strong><span data-preserver-spaces="true">457(b) plans</span></strong><span data-preserver-spaces="true">: If you leave your job before reaching age 59½, you can access your 457(b) funds without the 10% early withdrawal penalty, but you will still owe income taxes on the withdrawals.</span></p>
<p><strong><span data-preserver-spaces="true">401(k) plans</span></strong><span data-preserver-spaces="true">: The same early withdrawal penalty generally applies if you access your 401(k) funds before age 59½, unless you qualify for an exception. </span></p>
<h3><strong><span data-preserver-spaces="true">Access to funds</span></strong></h3>
<p><strong><span data-preserver-spaces="true">457(b) plans</span></strong><span data-preserver-spaces="true">: Some 457(b) plans may offer more flexible access to funds before retirement, such as allowing penalty-free withdrawals for unforeseen emergencies.</span></p>
<p><strong><span data-preserver-spaces="true">401(k) plans</span></strong><span data-preserver-spaces="true">: 401(k) plans often have stricter rules regarding early withdrawals, which can limit your access to the funds.</span></p>
<h3><strong>Which plan is better?</strong></h3>
<p><img decoding="async" loading="lazy" class="alignnone size-full wp-image-258868" src="https://www.financebrokerage.com/wp-content/uploads/2024/02/Untitled-2-1.jpeg" alt=" 457 vs 401k" width="1025" height="665" /></p>
<p><span data-preserver-spaces="true">One of the most popular questions when it comes to 457 vs 401k is, ‘Which one is better?’ Let’s find out! Let’s assume, you have to choose one of them. </span></p>
<p><span data-preserver-spaces="true">Determining which plan is better for you depends on your individual circumstances, employment situation, and financial goals. Here are some factors to consider when making your decision:</span></p>
<h4><strong><span data-preserver-spaces="true">Employment type</span></strong></h4>
<p><span data-preserver-spaces="true">If you work for a state or local government or a tax-exempt organization, a 457(b) plan may be your only option. Conversely, if you work in the private sector, a 401(k) plan is the relevant choice.</span></p>
<h4><strong><span data-preserver-spaces="true">Employer match</span></strong></h4>
<p><span data-preserver-spaces="true">If your employer offers a matching contribution, a 401(k) plan may be more attractive due to the “free money” you receive when you contribute.</span></p>
<h4><strong><span data-preserver-spaces="true">Contribution limits</span></strong></h4>
<p><span data-preserver-spaces="true">Both plans have similar contribution limits, so this factor may not be a significant differentiator.</span></p>
<h2><strong>Part two </strong></h2>
<p><span data-preserver-spaces="true">If you value the ability to access your retirement savings before age 59½ without penalties, a 457(b) plan may be more suitable for you. However, it’s important not to use retirement savings as an emergency fund, as it can jeopardize your long-term financial security.</span></p>
<h3><strong><span data-preserver-spaces="true">Investment options</span></strong></h3>
<p><span data-preserver-spaces="true">Evaluate the investment options available in each plan. The quality and variety of investment choices can vary, so consider your investment preferences and risk tolerance.</span></p>
<h3><strong><span data-preserver-spaces="true">Portability</span></strong></h3>
<p><span data-preserver-spaces="true">Consider whether you anticipate changing jobs or careers in the future. 457(b) plans can typically be rolled over into other eligible retirement accounts, but the process may be slightly different from rolling over a 401(k).</span></p>
<h3><strong><span data-preserver-spaces="true">Tax considerations</span></strong></h3>
<p><span data-preserver-spaces="true">Both 457(b) and 401(k) plans offer tax advantages, but the specific tax treatment may vary based on your individual tax situation. Consult a tax professional to understand how each plan aligns with your tax strategy.</span></p>
<h3><strong><span data-preserver-spaces="true">Overall financial picture</span></strong></h3>
<p><span data-preserver-spaces="true">Your retirement savings strategy should be part of your broader financial plan. Consider your other financial goals, such as paying off debt, building an emergency fund, and saving for major expenses, when making your decision.</span></p>
<h2><strong>Conclusion</strong></h2>
<p><span data-preserver-spaces="true"><img decoding="async" loading="lazy" class="alignnone size-full wp-image-258871" src="https://www.financebrokerage.com/wp-content/uploads/2024/02/Untitled-4-1.jpeg" alt="457(b) plan and a 401(k)" width="1025" height="665" /></span></p>
<p><span data-preserver-spaces="true">To sum up, the choice between a 457(b) plan and a 401(k) plan ultimately depends on your employment situation, financial goals, and individual preferences. Both plans offer valuable opportunities to save for retirement and benefit from tax advantages, but they have distinct features and eligibility criteria.</span></p>
<p><span data-preserver-spaces="true">When making your decision, it’s essential to weigh factors such as employer match, early withdrawal options, investment choices, and your long-term<a href="https://www.financebrokerage.com/financial-planning-specialist/"> financial goals</a>. Additionally, consider seeking guidance from a financial advisor or retirement planning professional to ensure your chosen retirement savings strategy aligns with your overall financial plan.</span></p>
<p><span data-preserver-spaces="true">Remember that the best retirement plan for one person may not be the same for another, so carefully evaluate your unique circumstances to make an informed choice. Lastly, regularly review and adjust your retirement savings strategy as your life circumstances change to ensure you are on track to achieve your retirement goals.</span></p>
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