403(b) vs. 457(b) - Which Is Better for Me?

For teachers who want to invest for their retirement, the 403(b) and 457(b) plans are the most popular salary reduction plans, each with its own pros and cons. The 403(b) plan typically offers a wider range of investments, like mutual funds and annuities, which can benefit teachers looking for more choices to match their investment strategy. However, it has a 10% early withdrawal penalty if accessed before age 59½, limiting flexibility for those who may want to retire early. In addition, depending on your school district's offerings, 403(b) plans are often riddled with high fees, including surrender charges for those who have figured out that they chose poorly. Many districts offer low-fee providers such as Vanguard and Fidelity. A Roth option may be available in your school district. To see a listing of independent ratings of 403(b) plan vendors, check out 403bwise.org. This site is run by a non-profit dedicated to educating teachers about 403(b) plans. You can search their database to see which plans are offered by your school district.

The 457(b) plan has the huge advantage of allowing penalty-free withdrawals once you leave your job, regardless of age, making it ideal for teachers who may retire early or want more accessible funds. Additionally, 457(b) plans offer a “double catch-up” feature for those nearing retirement, letting teachers contribute more in their last years before retirement. In South Carolina, the plan is offered through South Carolina Deferred Compensation. The fees in this plan are reasonable (see here) at 0.065% plus the expense ratios of individual funds. There are low-cost index funds and target date funds available in the plan. You can invest in the traditional or Roth version of the 457(b), but be aware that the penalty-free withdrawals before age 59.5 only apply to the traditional plan (as of 2024)

Ultimately, the choice depends on individual goals: the 403(b) may better for those seeking a long-term, penalty-free retirement savings structure (if a good, low-fee plan is available in your district), while the 457(b) could be useful for teachers desiring early access or higher catch-up contributions. Both offer valuable tax-deferred (or tax-free in the case of a Roth) growth, but each serves different retirement needs. The best part is that you don't have to choose one or the other! You can invest in both up to their limits, which are $23,000 for 2024 and $23,500 for 2025 (higher if you are over 50). That means that a teacher under 50 can invest up to $47,000 in workplace retirement plans in 2025 (in addition to $7,000 to your IRA)!

Do you want some professional help choosing and setting up your workplace retirement plan(s)? Hop on over to venablesfinancialsolutions.com and contact someone now! There will be no high-pressure sales tactics - our 100% fiduciary advisers will help you choose the best plan for you, and will not receive a commission. You only pay a fee for our service to help you set up your plans, regardless of which plan(s) you choose!