Difference between 401k and 457
The 401(k) and 457 retirement plans are both popular options for employees to save for their future, but they have distinct differences that can impact how much you save and how you invest. Understanding these differences is crucial for making informed decisions about your retirement savings.
Firstly, the primary difference between a 401(k) and a 457 plan lies in their eligibility. A 401(k) is available to employees of private sector companies, while a 457 plan is specifically designed for state and local government employees, as well as certain non-profit organizations. This means that if you work for a private company, you can only participate in a 401(k), whereas if you work for a government entity or a non-profit, you may have access to a 457 plan.
Another significant difference is the contribution limits. For the 401(k), the annual contribution limit is set by the IRS and can change each year. As of 2021, the limit is $19,500 for individuals under 50 and $26,000 for those aged 50 or older. In contrast, the 457 plan has higher contribution limits, with the ability to contribute up to $19,500 for individuals under 50 and $26,000 for those aged 50 or older, plus an additional $6,500 catch-up contribution for those aged 50 or older.
The tax treatment of these plans also varies. Both 401(k) and 457 plans offer pre-tax contributions, which means that the money you contribute is not subject to income tax until you withdraw it in retirement. However, the 401(k) plan allows for Roth contributions, which are made with after-tax dollars and offer tax-free withdrawals in retirement. The 457 plan does not offer Roth contributions, so all contributions are made on a pre-tax basis.
Investment options are another area where 401(k) and 457 plans differ. 401(k) plans typically offer a wide range of investment options, including mutual funds, index funds, and annuities. Some plans may also offer a target-date fund, which automatically adjusts the investment mix as you approach retirement. In contrast, 457 plans often have fewer investment options, but they may offer more aggressive or conservative funds tailored to the government employee’s retirement timeline.
Lastly, the withdrawal rules for these plans are different. With a 401(k), you can withdraw funds at any time, but you may be subject to penalties and taxes if you withdraw funds before age 59½. In contrast, 457 plans have a unique rule known as the “Rule of 55,” which allows government employees to withdraw funds penalty-free if they separate from service at age 55 or older.
In conclusion, the difference between a 401(k) and a 457 plan is significant, and it’s essential to understand these differences to make the most of your retirement savings. While both plans offer valuable tax advantages and investment options, the eligibility, contribution limits, tax treatment, investment options, and withdrawal rules are distinct, making it crucial to choose the plan that best suits your needs and circumstances.
