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Dan's Blog

457 Heaven 😇

October 6, 2020

Teachers have long enjoyed the ability to contribute to both the 403(b) and the 457(b), a defined-contribution plan widely used by police officers, firefighters, and other state and local government employees. In K-12 circles the 403(b) is more widely available, and maybe more widely understood. That's a big maybe given the total lack of objective retirement plan information provided to school employees. Nevertheless, there is a strong case to be made that the 457(b) is superior to the 403(b). 

Younger Cousin

The 403(b) was created in 1958. The 457(b) was birthed in 1978, the same year as the 401(k). While younger cousins often look up to older cousins, everyone knows that younger cousins grow up to be cooler. Surely, I'm more with it than my older cousins? 😊 Sorry Tracey, Tracey (different cousin), David, Jordan, Suzane and Jason. 

Similarities

How many times have you heard that someone looks or acts like a cousin? It's the same with the 457(b). Consider the similarities... 

  • 4 and a (b)  
  • Contribution limits: $19,500 (for 2020)
  • Age 50 catch up limits: $6,500 (for 2020)
  • Pretax or Roth
  • Age 59.5 in service renewal (new to the 457(b) in 2020)
  • Annuities or mutual Funds
  • Loans
  • Can contribute maximum permitable to both plans

Differences

  • 457(b): No 10% early withdrawal tax penalty when separting service 
  • 457(b): 3-Year-Rule — Allows the doubling of regular contributions for the three years prior to retirement (as designated by the employer)
  • 457(b): More fiduciary oversight required of employer

These are not trivial differences. More fiduciary requirement leads to better, lower-cost investment choices. The ability to access money penalty-free upon sepration from service creates planning flexibility. For example, a 457(b) at a previous employer could be considered an emergency savings account. It can also serve as a bridge between jobs or pension withdrawal. The ability to double contributions ($39,000 for 2020) for three years late in one's work life can be a game changer for those with modest savings. 

Side-by-Side Comparison

Get 457(b) Wiser

Excellent State Run 457(b) Plans

  • The New York state 457(b) plan, known as New York State Deferred Compensation, offers an S&P 500 index fund (NYSDCB Equity Index Unitized Account) charging 0.0084% in fees — not a misprint). The reason? The plan has $23 billion of assets under management. Best of all? All New York teachers are eligible to participate. See if your NY district offers this plan.
  • Our new Find a Good Vendor tool links to four quality, state-run plans: New York, Ohio, Washington and Wisconsin. If you work in one of these states, you can see if plan is available in your district. (Note: We will be adding states to this list).

We will continue to expand our 457(b) information with the goal of making you 457bwiser.

 

Related Podcast:

457(b) Now > 403(b)? Scott thinks a new 457(b) rule could make that plan a better choice than the 403(b). Listen Now »