How To Optimize 403(b) and 457(b) Retirement Benefits

Understanding how retirement plans work can sometimes feel overwhelming, especially with multiple savings options available. If you work for a nonprofit or school, you might have more than one option for retirement savings. These can include a 403(b) plan and a non-governmental 457(b) plan. The plans might also be available in addition to a deferred compensation, or pension, plan.

The more you know about these savings plans, the better you can decide where to allocate your contributions and how much to contribute. These plans are powerful tools that provide an opportunity to help save for retirement and build a secure financial future.

In this article, we give general guidelines for 403(b) and non-governmental 457(b) plans. These tips can help you understand, compare, and make the most of the benefits. Governmental 457(b) plans are often available to state and local government workers. They have different rules than non-governmental (tax-exempt) 457(b) plans.¹

What’s the difference between 403(b) and 457(b) plans?

Both tax deferred 403(b) and tax exempt 457(b) plans are retirement savings accounts. They each offer tax benefits.

Your employer may provide participation in one plan. In some cases, both plans might be available for participation. There may also be Roth contribution options available within a plan.

• 403(b) plan: A plan qualified under the Employee Retirement Income Security Act of 1974 (ERISA). This type of plan is similar to a 401(k) retirement account. Public schools and some nonprofits primarily offer the plan.

  The 403(b) plan allows pre-tax contributions from your paycheck. The plan invests your funds, and they can grow over time to support your retirement. The contributions in a traditional 403(b) can grow tax deferred. You are not taxed on the contributions or earnings in the year it is earned, but in the year you make a withdrawal.

  Your employer might offer a Roth 403(b) account. This allows you to make after-tax contributions from your paycheck. As a result, your withdrawals of your contribution and the earnings in retirement are tax-free.

• 457(b) plan: A non-governmental 457(b) is primarily offered by colleges and some nonprofits to high earners. The employer owns the plan, and it doesn’t have protection under ERISA. Which means these funds may have less creditor protection.

  The other main differences from a 403(b) are that you must opt-in. You may not have control over your fund’s investments or be able to roll the funds into another plan while you are working. However, it depends on the structure of the plan.

  This plan also allows pre-tax contributions. Participants do not pay taxes on the earnings from a non-governmental 457(b) until they take distributions in retirement.In-service withdrawals from a nongovernmental 457(b) plan have different rules than a 403(b) plan. These withdrawals are for “unforeseeable emergencies.” This type of plan doesn’t allow loans.With a non-governmental 457(b), the funds are typically only transferable into the same type of plan while you are working.

These plans work alongside pension systems and provide a way to save more on your own. A pension might not fully meet your retirement needs. Each pension plan has different benefits and payout options. It’s important to complement pension benefits with your other savings, investment accounts, tax strategies, and retirement goals.

What are the contribution limits?

For tax year 2025, there’s an annual contribution limit of $23,500 for 403(b) and non-governmental 457(b) plans. It’s a good idea to check your plan’s limits and catch-up contribution options. This helps you avoid tax penalties for putting in
too much money.

• 403(b) plan: Participants can contribute an extra $3,000 annually when aged 60 to 63 or with 15 years of service. If you’re aged 50 or older, you may be able to contribute an additional $7,500 to the plan. There might be other catch-up options available in the 403(b) plan as designated by the employer.
• 457(b) plan: Your 457(b) plan may offer extra catch-up options for the three service years prior to normal retirement age.

How do I decide how much to contribute?

The main considerations for contributions are your retirement timeline, your current tax bracket, and your pension expectations.

For example, as you near retirement you may want to contribute to a Roth account, if available. This option can offer you tax-free income in retirement. If you’re a high earner, you may get more tax savings with pre-tax contributions.

A balanced approach — splitting contributions between both plans — can offer flexibility and tax diversification.

Employer contributions may be made, which is basically free money. Contributing at least the percentage needed to maximize the employer match is practical.

Maximizing available plan contributions helps optimize your benefits in retirement. By contributing more, you get additional compound earnings. You’re more likely to keep your savings on pace with inflation by contributing the maximum amount allowed.

What investment options are available?

The investments offered in 403(b) and 457(b) plans are dependent on the plan’s structure and employer’s choices. Both types of plans typically offer mutual funds, annuities (which may come with higher fees), and target date funds.

For plan participants who don’t make an investment election, many employers default to target date funds because they automatically adjust based on their planned retirement age. You might also hire an advisor to manage your account.

Do you know who is managing your retirement savings account? At Mercer Advisors, we offer our clients the option to consolidate former employer 401(k), 403(b), 457(b), and some Thrift Saving Plan (TSP) accounts. Having an integrated investment strategy can provide a more holistic view of finances. We also manage all the activity in the account related to trades, allocations, rebalancing, and more.

What is the taxation on withdrawals?

Plans differ in whether they allow early withdrawals and their tax penalties.

• 403(b) plan: There is income tax on withdrawals. If you take money out before age 59 ½, there is usually a 10% penalty. Some exceptions may apply, such as hardship withdrawals, according to plan or IRS rules.
• 457(b) plan: If you are under age 59 ½ and no longer work for the employer, you can withdraw money without a penalty. You will still have to pay income taxes on the withdrawals.

What happens to the funds after I leave the job?

Depending on your age, balance, and plan rules, you may be able to leave the funds in the plan, roll the funds into another account, or take distributions.

• 403(b) plan: If you’re able to leave the funds with your former employer’s plan, you won’t be able to make additional contributions, but the investments can stay the same. You will begin required minimum distributions (RMDs) at age 73 or 75, depending on your birth year.You should compare account fees if you decide to roll the funds over to an IRA or a new employer’s plan. A rollover won’t trigger income taxes.If you cash out before reaching age 59 ½ there will be a 10% early withdrawal penalty.
• 457(b) plan: You may be able to leave the funds with your former employer’s plan. You will begin the required minimum distributions (RMDs) at age 73 or 75, depending on your birth year.If you cash out, you’ll pay income tax on the distribution but no 10% early withdrawal penalty.

How can I maximize retirement savings?

If you qualify, you can use both a 403(b) plan and a non-governmental 457(b) plan to help you increase your yearly savings potential.

Start making plan contributions as early as possible and increase them over time. Coordinate with other income sources like Social Security, pensions, and personal savings for a holistic retirement strategy. Avoid early withdrawals or other distributions that come with penalties or significant tax implications.

Where can I get personalized guidance?

The information in this article is general. It offers basic guidance that may or may not fit your situation. Anytime retirement benefit decisions are made, it’s important to consider all financial factors and circumstances. There may be age, health, family, tax, and other factors that can affect financial decisions.

Mercer Advisors has 40 years of experience helping clients throughout their retirement journey. The key to a successful retirement strategy is a comprehensive financial plan. We develop a personal financial plan and connect your investments, savings, estate plan, tax strategy, insurance coverage, and more — so you don’t have to worry about money.

If you want to learn more about optimizing retirement benefits with employer-sponsored savings accounts, as well as how we can help you reach your financial goals, let’s talk.

¹“Comparison of tax-exempt 457(b) plans and governmental 457(b) plans | Internal Revenue Service.” IRS.gov, 2025.

Mercer Advisors Inc. is a parent company of Mercer Global Advisors Inc. and is not involved with investment services. Mercer Global Advisors Inc. (“Mercer Advisors”) is registered as an investment advisor with the SEC. The firm only transacts business in states where it is properly registered or is excluded or exempted from registration requirements.

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