401k 403b 457 plans are often lumped together as workplace plans because each is offered through a company as a benefit. Each of these plans typically offers an opportunity for an employee to contribute to their account with pre-tax money. But there are differences among these plans.
401(k)’s were born out of the original profit sharing plan. Which originally was a plan to which only employers contributed for their employees (as a ‘share’ of profits). Eventually, line 401(k) in the Internal Revenue Code (IRC) was written to allow employees to defer salary into these plans also. Interestingly, due to financial difficulties, it has morphed into a situation where most of the retirement plan contributions are deferrals and that ‘profit sharing’ has nearly disappeared!
403(b)’s are retirement plans that only non profit organizations/employers can set up. These are purely salary deferral plans with no profit sharing element. The idea is that number one, non-profits don’t earn a ‘profit.’ And number 2, they need a plan to offer employees that was not too administratively burdensome nor costly.
I know I can hear some of my clients say “Chris, I work at a non-profit and I get a match. Why do you say that 403(b)’s for non-profits only allow salary deferrals?” This is true. Some non-profits offer a match/employer contribution. But it is done differently.
Either the employer also maintains a 401(a) plan (there’s that IRC line 401 again) alongside the 403(b) as many universities do. Or the non-profit sponsors a 401(k). Something they were allowed to do some years back due to the fact that non-profits couldn’t offer a match through their 403(b).
The 457 Plan
457 Plans are deferred compensation plans offered through municipal governments. They have some unique rules. However, some rules recently changed regarding Roth conversions which make them more on par with 401(k)’s.
457s also had some unique benefits in the past. However, recent legislation has worked to make 401k-403b-457 plans more consistent with each other. The original idea – that I am guessing – was that municipal employees earned less than private sector employees and needed some special privileges.
However, today, that perspective has changed. Government employees earn much more in total compensation than many private sector employees.
Bottom Line on 401k 403b 457 and Other Qualified Retirement Plans
The generous contribution limits make these workplace plans a handy tool in tax planning and retirement planning for most people.
Recent worry about deficits, national debt, and the effects on future tax rates make some advisors caution against putting too much into pre-tax plans. Instead some recommend that more go into a tax-free plan like the Roth 401(k)/IRA. You can best answer this question after you perform a full analysis of your situation. Then you can consider intelligent recommendations.
Want More Information?
For more information on planning ideas, including how to access retirement plan money as early as age 55, see our list of recent financial articles. These include
NUA – Net Unrealized Appreciation (if you hold company stock in your 401k)
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