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403(b) Plans

403(b) Plans are tax-sheltered retirement arrangements maintained by public education organizations and certain tax-exempt entities. It allows employees of hospitals, educational institutions, and other non-profit organizations to save and invest for their own retirement. Contributions are often made through salary reduction, but employer contributions can also be made. Unlike 401(k) plans, 403(b) plans cannot invest in individual stocks. Instead, their choices are limited to annuity contracts with insurance companies, custodial accounts made up of mutual funds or retirement income accounts for churches. As with a 401(k), distributions can be made only at prescribed times, and are generally limited to when the employee retires, dies or reaches the age of 59½.

457 Plans

457 Plans (often called Deferred Compensation Plans) are non-qualified, deferred compensation plans available only to employees of state and local governments and other non-governmental tax-exempt organizations. They are not subject to the requirements of a qualified plan, but they must meet their own requirements under the Internal Revenue code. Distributions are made upon retirement, termination of employment, extreme financial hardship or at death. Distributions from these plans are taxable as ordinary income.

The Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001 greatly enhanced the opportunities for employees of state, municipal and local governmental units (including public schools) to save for retirement. Section 457 Plans now have increased contribution limits and more flexibility than ever before. Contributions to a 457 Plan no longer reduce an employee's ability to participate in other retirement plans and basic contribution limits were increased. For example, a public school employee can participate in a 403(b) plan and a 457 plan and contribute the maximum amount allowed to both plans. Employees over age 50 and those nearing retirement are allowed additional contributions to the plan.

Unlike other retirement plans, there is no 10% excise tax on distributions at any age, including termination of employment or unforeseeable emergency withdrawals. Additionally, rollovers to other qualified plans and to IRA's are now permitted.

457(f) "Top-hat" Plan

457(f) plans are ineligible 457 plans that are established to provide additional retirement opportunities to the entity's executive staff. These plans are subject to the general creditors of the entity. These plans are typically established by tax-exempt entities but rarely by governments. These plans do not have any limit on employer or employee contributions; however, the contributions remain unvested to the participants in the plan until they have met the criteria established by the plan. Upon meeting this criteria, the participant is allowed to take a lump-sum distribution.

Reasons you would want to participate in this type of plan:
  • No contribution limits
  • Tax deferral for a period of time
Reason you would NOT want to participate in this type of plan:
  • If you terminate employment before your time period is completed, you forfeit all your money. (Employee and employer contributed)
  • The money remains the property of the employer until vested. If employer is insolvent, the employee loses his/her money.
  • Once employee becomes vested in the money, the funds are immediately distributed and taxable to the employee.
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