Ask the grumpies: 457 vs 403(b)

Viola asks:

I have access to both a 403b and a 457 retirement account at my new employment university (along with a mandatory retirement plant that I cannot increase or decrease my contributions to). I think that you contribute to both these types of accounts because you are super-awesome savers, but if I’m just going to do one, which should I do? A little background: the mandatory plan will take 5.5% of my yearly salary, and the uni will contribute 10% of my yearly salary to that plan as well. I can contribute whatever I want to the 403b or 457, but will not get a match. I’m 33 years old, and only started contributing to a retirement account about two years ago (~15%/year), because I have been financially idiotic for most of my life.

Well, gee.  There’s not a straight-out answer here.  It’s going to depend a lot on the characteristics of the two plans.  Most likely, it won’t matter too much which you choose, but here are some things to think about.

1.  What are your investment options for the 403(b) vs the 457?  Is Vanguard a choice for either?  In terms of investment options you want two things:

A.  Low fees
B.  The ability to have a diversified portfolio

The return that you get is going to depend a lot on these two options.  In my university, there are a lot of choices for the 403(b), but only one option for the 457.  We like the options in the 403(b) a little bit better, so that’s the way we’ve gone.  The fees were tough to compare between the two types of plans, but that should be changing soon with legislation to make comparisons clearer.  (I had to do some math to figure out what the step-function flat dollar fees for the 457 plan translated to compared to the straight percent for the 403(b).  At the amounts we were investing, the fees were about the same.)

2.  When do you plan on drawing down for retirement, and do you plan on leaving state employment, and if you do plan on leaving state employment, would you need to access that money?

The 403(b) has larger early withdrawal penalties, and if you leave state employment, you can roll it over into an IRA, but you pay a penalty to directly access that money.  With the 457 plan, you don’t have that penalty (note:  you can still roll over into an IRA upon leaving your job).  There are a few other small differences if you are older or need hardship withdrawals.  Also note that you can actually save in BOTH, if you have enough extra money floating around.

So if you want to make it more difficult to tap into your retirement money before you hit retirement age, go with the 403(b).  If you think you’ll need that money in case of job loss or leaving your job (or if worries about job loss are keeping you from contributing), then go with the 457.

Those seem to be the relevant points to consider to me.  What am I leaving out?  Has anybody in the Grumpy Nation made a decision between the two types of plans?

7 Responses to “Ask the grumpies: 457 vs 403(b)”

  1. Debbie M Says:

    I agree totally. My options were mediocre at best until I figured out (from Grumpy Rumblings) about the Fidelity Spartan funds. (Arg! Annuities?) So I maxed out my Roth IRA first (where I could invest however I wanted–I opened one directly at Vanguard).

    When I started having extra money, I put it in the 403(b) because by then we had a Roth version. (I’ve always been in the 15% bracket, plus my pension will be taxed, plus I grew up in the seventies so I feel tax rates can go nowhere but up. So I love Roth.) But later I also started putting some money in the 457 as an unemployment/early retirement savings vehicle. So if part of your emergency fund is for unemployment, you could put it in a 457, though it won’t then be available for other emergencies. Note that any money you put into a Roth IRA can be taken out without penalty (though you can’t take out the extra part that you get from capital gains, dividends, etc.), so you can put some of your emergency fund there. It does really hurt to pull money out from there (not that I’ve done it yet), but you can contribute more than you otherwise would be able to afford to save for retirement by putting it there.

    Note also that sometimes your investing options change over time, but in my case, we could always leave our money in the old places if we liked them better. It’s just new money that has to go in the new places. So you might want to re-make this decision each time there’s a big change in offerings.

    Finally, saving 15% a year for retirement may seem financially idiotic to you, but sadly that’s well above average and even above many recommended saving rates. So, you go, Viola!

    • nicoleandmaggie Says:

      Great points.

      Yay Spartan funds!

      We will be back to saving around 15% of income this coming year with DH leaving his job. That’s generally what’s recommended to aim for on average. However, if you’re 33 and haven’t been saving age 25-31, then you might want to scoot closer to the 20% mark, give or take (there’s a lot of things to take into account, but the save 10-20% of your income for retirement heuristic covers most cases). That way you won’t have to make up for those lost earnings when you’re much older and may have more limited options (in case of health problems or unintentional job-loss). If you end up doing 30% for an extended period of time, that will give you more options down the road should you decide you want or need a change.

      In general, there’s no need to increase contributions all at once if doing so is difficult and you’re getting on track– one recommended thing to do is to increase your retirement contributions by a percent every time you get a raise until you’ve hit a level that a retirement calculator would be happy with. Another suggestion is to throw some extra money into a Roth whenever you get a windfall.

      As Debbie M points out– you do have that third option, the IRA ROTH (or traditional IRA if you want to get the tax break now). The Roth also has the benefit of doubling as an emergency fund as you can take out the principal without penalty (in case you have an emergency).

      • Debbie M Says:

        Oh, thanks for adding the link to my reply. That is exactly where I found it.

  2. Comradde PhysioProffe Says:

    I can’t ever keep straight what the f8cken f8cke these f8cken things are in the first place.

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