Can You Contribute to Both a 403(b) and a 457 Plan?
For those employed in the public sector, nonprofit organizations, or educational institutions, saving for retirement often involves two powerful tools: the 403(b) and 457 plans. While both of these retirement savings vehicles are individually beneficial, there's an often-overlooked advantage—many employees have the unique ability to contribute to both plans simultaneously. This dual-contribution strategy not only allows you to supercharge your retirement savings but also provides flexibility and tax benefits along the way.
In this article, we’ll explore how these plans work, the rules and regulations governing them, and how contributing to both can lead to greater financial freedom in retirement.
Understanding 403(b) and 457 Plans
Before diving into the benefits of contributing to both plans, let’s take a closer look at each:
What Is a 403(b) Plan?
A 403(b) plan is a tax-advantaged retirement savings plan designed for employees of public schools, nonprofit organizations, and certain tax-exempt employers. It works similarly to the private sector’s 401(k) plan, offering:
Pre-Tax or Roth Contributions: Contributions can be made on a pre-tax basis, reducing your taxable income today, or as Roth contributions (if available), where you pay taxes up front and enjoy tax-free withdrawals in retirement.
Tax-Deferred Growth: Investment earnings grow tax-deferred, meaning you won’t pay taxes on gains until you withdraw them.
Contribution Limits: For 2025, the annual contribution limit is $23,500 for those under age 50, with an additional $7,500 catch-up contribution allowed for employees age 50 and older.
What Is a 457 Plan?
A 457 plan, often available to government employees and some nonprofit workers, is another tax-advantaged retirement savings plan. While it shares similarities with the 403(b), the 457 has unique features:
Pre-Tax or Roth Contributions: Like the 403(b), contributions can reduce your taxable income now or be made as Roth contributions (if available) for tax-free withdrawals later.
Penalty-Free Early Withdrawals: Unlike the 403(b), a 457 plan allows penalty-free withdrawals if you separate from your employer, regardless of age.
Contribution Limits: The contribution limits for the 457 plan are identical to the 403(b) in 2025—$23,500 for those under age 50 and an additional $7,500 catch-up contribution for those 50 and older.
The Power of Contributing to Both Plans
The ability to contribute to both a 403(b) and a 457 plan is a unique benefit available to many public sector and nonprofit employees. Unlike other retirement plans where contribution limits are shared, the IRS allows you to contribute the full annual limit to both plans, effectively doubling your savings potential.
Key Rules to Know
Separate Contribution Limits: The contribution limits for the 403(b) and 457 plans are entirely independent. This means you can contribute $23,500 to your 403(b) and another $23,500 to your 457 plan in 2025, for a combined total of $47,000 (or $62,000 if you're age 50 or older and eligible for catch-up contributions).
Catch-Up Contributions: If you’re 50 or older, you can contribute an additional $7,500 to each plan, potentially saving up to $62,000 annually.
Special 457 Catch-Up Provision: In the three years leading up to your plan’s normal retirement age, you may be eligible to contribute up to double the annual limit to the 457 plan, allowing you to save even more.
Tax Benefits: Contributions to both plans can reduce your taxable income significantly if made on a pre-tax basis, potentially lowering your tax burden during your working years.
Advantages of Dual Contributions
Maximized Savings Potential: By contributing to both plans, you can save up to twice the annual limit, accelerating your path to a secure retirement.
Tax Diversification: With the option to contribute pre-tax or Roth dollars, you can create a tax-diversified retirement portfolio, giving you flexibility in managing your taxes during retirement.
Access to Funds: The 457 plan’s penalty-free early withdrawal rules provide greater flexibility if you need access to your funds before age 59½.
Employer Matching: Some employers provide matching contributions to one or both plans. Be sure to take full advantage of any available matching dollars, as this is essentially free money for your retirement.
Important Considerations
While contributing to both a 403(b) and 457 plan offers incredible savings potential, there are a few things to keep in mind:
Budgeting for Contributions: Maxing out both plans may not be feasible for everyone. Be sure to prioritize essential expenses and emergency savings before committing to large contributions.
Investment Options and Fees: Each plan has its own investment lineup and fee structure. Review your options carefully to ensure they align with your financial goals. Typically 457 plans have less investment options which could be a downside.
Coordination with Other Retirement Plans: If you’re also contributing to a Roth IRA, Traditional IRA or other retirement accounts, make sure your total contributions align with IRS rules and your overall financial strategy.
Strategies for Success
If you’re considering contributing to both a 403(b) and 457 plan, here are a few strategies to make the most of this benefit:
Start Early: The sooner you begin contributing, the more time your investments have to grow tax-deferred.
Prioritize Employer Matches: If your employer offers matching contributions, aim to contribute at least enough to receive the full match.
Automate Savings: Set up automatic payroll deductions to ensure consistent contributions to both plans.
Consult a Financial Advisor: A financial professional can help you determine the right contribution levels and investment strategy based on your unique goals and circumstances.
Conclusion
The ability to contribute to both a 403(b) and 457 plan is a powerful opportunity for public sector and nonprofit employees to maximize their retirement savings. By taking advantage of this dual-contribution strategy, you can save more, reduce your taxable income, and build a tax-diversified retirement portfolio—all while enjoying the flexibility and benefits each plan offers.
Whether you’re just starting your career or nearing retirement, understanding these plans and their rules can help you create a retirement strategy that positions you for long-term financial success. If you’re unsure where to start, consider working Keep It Simple Financial Planning to develop a plan tailored to your needs. Your future self will thank you!