Company plans differ, but many individuals don’t know – or care – which category their plan falls into. Should you care?
3 Types of Company Savings Plans
- 401(k) plans if you work for a for-profit company;
- 403(b) plans if you work for a tax-exempt employer, a public school, or a church; and
- 457(b) plans if you work for a state or local government.
(This article doesn’t cover the Thrift Savings Plan for federal government workers and the military or 457(b) “top-hat” plans for tax-exempt employers.)
Similarities
For the most part, it doesn’t matter which type of plan you’re in, since many features are exactly the same in all three. For example:
- Each plan allows elective deferrals up to $20,500 for 2022, and employees who are age 50 or older can make an additional $6,500 of catch-up contributions.
- All three can allow Roth contributions and plan loans.
- Hardship withdrawals are usually available, although the 457(b) hardship standard is stricter than the 401(k)/403(b) standard.
- Required minimum distributions (RMDs) are required, but the “still-working exception” may be used. If you don’t own more than 5% of the company, that exception allows you to defer RMDs until the year you retire or separate from service.
- You must be allowed to directly roll over eligible distributions from all three plans to IRAs or other plans. However, your employer must withhold 20% for federal income taxes if you don’t directly rollover your payout.
- All three can allow in-service distributions at age 59 ½.
Differences
There are also some important differences among the plans to consider:
- While 401(k) and 403(b) plans can offer after-tax contributions, 457(b) plans can’t.
- In determining RMDs, 403(b) plans can be aggregated, but 401(k) and 457(b) plans can’t be aggregated.
- A 10% early distribution penalty applies to 401(k) or 403(b) distributions made before age 59 ½. For some reason, the penalty doesn’t apply to 457(b) distributions – except for the distribution of monies previously rolled over into the plan from non-457(b) plans or IRAs.
- Only 403(b) plans allow for a special catch-up contribution if you have at least 15 years of service. Only 457(b) plans allow a special catch-up for the last three years before your retirement date.
- Whether your plan dollars are protected from creditors depends on which plan you’re in. You enjoy complete protection under ERISA if you’re in a 401(k) plan (except the Thrift Savings Plan) or a 403(b) plan where your employer makes contributions. If you’re in a 403(b) plan where your employer doesn’t contribute (and isn’t administratively involved with the plan) or you’re in a 457(b), you only have whatever creditor protection is available under your state’s laws. That protection varies from state to state.
By Ian Berger, JD
IRA Analyst
