403(b) plans, also known as tax sheltered annuities (TSAs), and 457 plans are quite similar to 401(k) plans. Both plans allow employees to defer income and benefit from tax deferred growth, and both plans enable employers to provide matching contributions. 403(b)s and 457 plans, like 401(k)s, have a 2009 contribution limit of $16,500 with an additional $5,500 “catch-up” contribution available to employees over 50 years of age. In most cases, withdrawals from both plans before the age of 59.5 will be subject to a 10% penalty. Lastly, required minimum distributions (RMDs) are required from both accounts once the investor reaches age 70.5.
403(b) accounts, however, are only available to public educational systems and certain tax-exempt organizations. Meanwhile, 457 plans are only available to certain government entities. These plans are attractive to nonprofit and government employers because they are not technically qualified employer retirement plans, so employers can offer these plans to all employees, particular groups, or just individual employees whom the employer wants to benefit.
Public education systems and tax-exempt organizations also have the ability to offer Roth 403(b)s, which lack the benefits of an initial tax deduction, but offer tax-free growth. All 403(b) plans can invest in three types of assets:
1. Annuity contracts (both fixed and variable)
2. Mutual funds
3. Life insurance
An employee who participates in an employee-sponsored 403(b) plan cannot also participate in a 401(k) account. However, 457 plan participants do have the ability to make additional contributions to other employer-sponsored plans. Thus, certain government employees have the ability to contribute as much as $16,500 to their 457 plan, and an additional $16,500 to a 401(k).
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