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Brownstone

457 Vs 403b

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Hello all,

 

This has to be covered somewhere, but I haven't been able to find it yet.

 

If one has the choice between a 403(b) and a 457, what are the differences between the two types of plans that could lead to choosing one over the other? In our case, the investment providers are different, and that may be a deciding factor once we know more. But other than that, are their any key differences between these two plans that could make a practical difference?

 

Thanks!

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Hey Brownstone,

 

Good idea for making this a specific FAQ or feature. We will work on something... In the meantime here are a couple of items from our 457(b) FAQ and our 457(b) Must Read pages that may be of interest...

 

Read Between the Numbers: 403(b)s and 457s

 

Unlike the 403(b) plan, the employer must create a plan document detailing the specific rules of the plan.

 

Your employer's plan document will be the best source of information for your particular situation.

 

A 457(b) plan must be held in a trust for the exclusive benefit of the plan's participants and beneficiaries. Section 457(g)(3) of the IRC allows public (governmental) plans to use qualifying annuity contracts and/or custodial accounts in lieu of, or in addition to, a trust to satisfy this requirement.

 

A big advantage to the 457(b) plan is that it is not subject to the age 59 1/2 withdrawal rule. This means there is no 10% penalty for early withdrawal at retirement or upon termination of employment. [Note: This benefit applies only to public (governmental) plans. Private plan participants generally will pay federal income taxes when funds are made available to them. They may, however, defer receiving funds and instead be taxed when they actually take distribution].

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We tell participants to first contribute to the plan that offers a match, at least up to the match. Then contribute to the plan that offers the best investment choices. This is typically the 457(b) because the employer is required by law to be a fiduciary (i.e. act in the best interests of the employee). This also means that most likely the employer has put the plan out to bid. Such a process often results in vendors lowering cost structure. The 403(b), on the other hand, is more often than not characterized by numerous high fee insurance and brokerage offerings. Good luck.

 

Dan Otter

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