403(b) or 457(b):
Which should you choose?

One of the most important decisions you can make is saving for your future. You owe it to yourself to explore both UC’s 403(b) and 457(b) Plans. Employer-sponsored plans like these are among the easiest ways to develop good savings habits.

Here's what you need to know.

As a UC employee, you can contribute to the 403(b) and the 457(b) as long as you are not a student working fewer than 20 hours per week. You can contribute to either plan or both plans, depending on your budget.

In 2020, you can contribute up to $19,500 to each plan if you are under age 50 (up to $39,000 total this year). You can contribute up to $26,000 to each plan if you are age 50 or older (up to $52,000 total this year).

So, should you contribute to one plan, or to both? While the 403(b) and 457(b) are alike in many ways, there are some key differences that can affect your decision.

How are the plans the same?

Both plans are designed to let you save for your future with tax advantages. Your contributions come out of your paycheck before taxes, so it costs you less to save for your future. For example, when you contribute $100 in the 403(b) Plan or 457(b) Plan, it really only costs you $75 out of your paycheck (assuming a 25% tax bracket). Why? Because you pay $25 less in income taxes today. And that means more of your money goes to work for you.

How are they different?

The key difference between the two plans is how and when you can get access to your money. If you have an extreme financial need while you are working for UC and have to tap your retirement savings, the UC 403(b) offers you more options.

Loans from the plan.  

  • 403(b): The UC 403(b) Plan will allow you to take a loan from your account if you need one. Of course, the 403(b) is designed to let you save for retirement, so make sure you examine all your other options before you take a 403(b) Plan loan.
  • 457(b): The UC 457(b) Plan will not allow you to take a loan from your plan account.

Withdrawals while you're working at UC.

  • 403(b): Once you reach age 59½, you can take withdrawals from the 403(b) Plan without a penalty, even if you are still working for UC. Generally, there is a 10% federal tax penalty on withdrawals you take before age 59½, but there are a number of exceptions. For example, if you leave UC employment after age 55, you can take a withdrawal without penalty.
  • 457(b): While you are working at UC, you are not able to take withdrawals from the 457(b) Plan until you are at least age 70.5.  However, if you are no longer working at UC, you can take withdrawals before age 59½ without an early withdrawal tax penalty.

Withdrawals for a severe financial need.

  • 403(b): If you have a financial hardship while you are working at UC and you're under the age of 59½, you may qualify for a hardship withdrawal from your 403(b) Plan account.
  • 457(b): While you are working at UC and under the age of 70.5, and you have an unforeseeable emergency, you may qualify for a withdrawal from your 457(b) Plan account.

Wondering which plan is right for you?

It all comes down to when you expect to leave UC and the flexibility you need in accessing your money. If you expect to work for UC for a long time, and while working think you might need access to some of the money before age 70.5, you may want to start by contributing to the 403(b) Plan.

In general, the UC 403(b) offers more flexibility. So if you want to save with tax advantages but want the ability to access your money while you are working, the UC 403(b) might be your best bet. And you can get started saving in the 403(b)  in less than a minute at UCRSPenroll.com.