Depending on whom your employer is, you may find your choice for a tax-deferred retirement savings account limited. However, in some situations you will have a choice of investment vehicles. You can choose one or the other or put some of your paycheck into each type of retirement account to create additional diversification. A 403B plan and a 457B plan do not require you to commit all of your retirement savings into one account or the other. In fact, you can contribute the maximum amount to each account if you want to do so.
A 403(b) retirement plan is a tax-deferred plan for workers employed by educational institutions and certain nonprofit organizations. An employee’s contributions and any earnings grow tax deferred until they are withdrawn at retirement. The withdrawal is then counted as income that year and taxed at the account owner’s normal tax rate. Teachers, school administrators, school personnel, nurses, doctors, professors, researchers, librarians and ministers are generally the type of people who have 403(b) accounts.
With a 457(b) plan, employees make pretax contributions to their account, which reduces their taxable pay. The contributions and earnings grow tax-deferred until withdrawn at retirement. Income tax is then paid on the withdrawn amount only. Both governmental entities and tax-exempt organizations can set up a 457(b) account for their employees. A big difference between a 457(b) and a 403(b) is that a 457(b) plan does not have to be made available to all employees, but any person who provides service to the employer, such as part-time employees and independent contractors, can be allowed to participate in the plan.
Contributions to Both
If your employer offers both types of retirement accounts, you can contribute to both types. Public school employees are the workers who usually have this option since public are an educational institution and a governmental institution. Also, since the Economic Growth and Tax-Relief Reconciliation Act was passed in 2001, employees who have both types of accounts can contribute the maximum amount to both accounts.
For 2011, the maximum contribution in a 403(b) or 457(b) is $16,500. For employees who earned enough, they can contribute a total of $33,000 between the two accounts. If an employee is nearing retirement, catch-up contributions will allow employees to contribute even more. While 457(b) plan contributions do not need to be combined with any other plan to calculate the maximum contribution, 403(b) plan contributions must be added to any contributions to other 403(b) or 401(k) plans and not exceed $16,500.