403(b) and 457(b) Plans: The Retirement Accounts Public-Sector Workers Need to Understand

403(b) plans are offered by public schools, colleges, hospitals, churches, and 501(c)(3) nonprofits. If you are a teacher, professor, nurse, or work for a tax-exempt organization, your retirement plan is almost certainly a 403(b) rather than a 401(k).

457(b) plans are offered by state and local governments and some tax-exempt employers. Many public-sector workers — police officers, firefighters, city employees, and especially school district staff — have access to both a 403(b) and a 457(b) through the same employer.

Both are 'defined contribution' plans, like a 401(k). You contribute pre-tax (or Roth) dollars from your paycheck, the money grows tax-deferred, and you withdraw it in retirement. The differences from a 401(k) — and from each other — are in the details, and the details matter.

Contribution limits are identical: $23,500 in 2025, with a $7,500 catch-up if you are 50 or older. Employer matches work the same way. Vesting schedules apply the same way. Tax treatment is the same.

The big functional difference is the investment menu. Many 403(b) plans, especially in K–12 school districts, are dominated by high-cost variable annuity products sold by insurance companies. Expense ratios of 1.5% to 3.0% per year are common — three to ten times what a 401(k) at a private-sector employer typically charges.

The cause is regulatory. 403(b) plans for public schools are often exempt from ERISA, which means employers have no fiduciary duty to vet the investment options. Annuity salespeople have walked into teachers' lounges for decades and signed up unsuspecting educators into expensive products.

There is a 403(b) catch-up rule unique to long-tenured employees: workers with 15+ years of service at the same qualified organization can contribute an extra $3,000 per year (lifetime cap of $15,000), on top of the standard catch-up.

457(b) plans have the same $23,500 contribution limit and same $7,500 age-50 catch-up. But they have two unique features that make them powerful planning tools.

First, there is no 10% early-withdrawal penalty. With a 401(k) or 403(b), pulling money out before age 59½ triggers a 10% federal penalty on top of income tax. With a 457(b), you can withdraw at any age as soon as you separate from service — no penalty. This is enormously valuable for anyone considering early retirement.

Second, the 457(b) catch-up provisions are more generous. The standard age-50 catch-up applies. But in the three years before normal retirement age (as defined by your plan), you can contribute up to double the regular limit — $47,000 in 2025 — if you have not maxed out in prior years. This 'pre-retirement catch-up' is unique to 457(b)s.

One caveat: 457(b) assets at private nonprofit employers are technically the employer's property until distributed, and could be seized by creditors in bankruptcy. Governmental 457(b)s (the kind most public employees have) hold assets in a separate trust, so this risk does not apply.

Here is the part most personal-finance articles ignore: 457(b) contribution limits are entirely separate from 403(b) and 401(k) limits. If your employer offers both a 403(b) and a 457(b) — and many public school districts do — you can contribute the full $23,500 to each, for a combined $47,000 of pre-tax savings in a single year.

Add the age-50 catch-up to both and a 50-year-old can sock away $62,500 in 2025. Add the 403(b) 15-year service catch-up and the 457(b) pre-retirement catch-up in the right years and the number gets even larger.

This is the single biggest retirement-savings advantage available to any worker in America — and the majority of public-sector employees do not know they have it. If you work for a school district or state agency, log into your benefits portal and check whether you have access to both plans.

If you are stuck in a 403(b) with 2%+ annual fees, you have options. First, find out whether your employer offers multiple 403(b) vendors. Most plans do. The vendor list often includes a low-cost option (Vanguard, Fidelity, TIAA) buried beneath the heavily marketed insurance products. Switching costs nothing.

Second, check whether your plan allows in-service exchanges or transfers. Some plans let you move existing balances from a high-cost vendor to a low-cost vendor while you are still employed. This is called a 90-24 transfer (after the IRS revenue ruling that allows it).

Third, contribute only enough to your 403(b) to capture any employer match, then redirect additional savings to a Roth IRA (up to $7,000 in 2025) and a 457(b) if you have access to one. The 457(b) typically has a better investment menu than the 403(b) at the same employer.

When you leave the job, both 403(b) and 457(b) balances can usually be rolled into an IRA or a new employer's 401(k)/403(b). The mechanics are similar to a 401(k) rollover.

Important warning for 457(b) holders: rolling a governmental 457(b) into an IRA preserves the tax-deferred status but eliminates the no-early-withdrawal-penalty feature. If you plan to retire before 59½ and want to draw on those funds penalty-free, leave the money in the 457(b) until you have used what you need.

Roth versions of both 403(b) and 457(b) plans exist and have grown in popularity. The Roth versions follow the same rules as their pre-tax counterparts, but contributions are after-tax and qualified withdrawals are tax-free. The Roth vs Traditional decision for public-sector workers follows the same logic as for any other retirement account — covered in our Roth vs Traditional IRA guide.