403(b) or 457(b): Which Should You Choose?

One of the most important decisions you can make is to get started saving for your future.

If you’ve never enrolled in an employer-sponsored retirement savings plan before, you owe it to yourself to explore UC’s 403(b) and 457(b) Plans. Employer-sponsored plans like these are among the easiest ways to develop good savings habits.

Where to start

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 2018, you can contribute up to $18,500 to each plan if you are under age 50. You can contribute up to $24,500 to each plan if you are age 50 or older.

If you can afford it, you can contribute the annual maximum to both plans.

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.

The 403(b) The 457(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. The UC 457(b) Plan will not allow you to take a loan from your plan account.
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. While you are working, you are not able to take withdrawals from the 457(b) Plan until you are at least age 70½.
If you have an unforeseeable emergency, you can take a hardship withdrawal from your 403(b) Plan account. If you have an unforeseeable emergency, you can take a withdrawal from your 457(b) Plan account.

The bottom line?

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 but think you might need access to your money earlier than age 70½, you may want to start by contributing to the 403(b) Plan.

When you’re confident in your budget and your investing skills, consider contributing to both plans to make full use of the tax advantages they provide.

Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

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What's the difference?