Updated: July 2025
Are you a public sector employee looking to ramp up your retirement savings? 403(b) and 457 plans offer substantial tax benefits and contribution limits to help you generate retirement wealth. These plans, available through non-profits, schools, churches, and government agencies, let you sock away tens of thousands of dollars each year for the future. You can choose from investment options like mutual funds, annuities, and often ETFs to tailor a strategy matching your financial goals. And some plans provide employer matching, giving you free money to help your balance grow even faster.
If your retirement savings are behind schedule, enhanced catch-up provisions now allow those 50 and over to contribute thousands more each year to make up ground, with even higher limits for those aged 60-63. For the highly compensated, 457(f) plans pose risks but give you the potential to shelter huge portions of your income for retirement.
Whether new to the workforce or nearing retirement, 403(b) and 457 plans offer features to help you save what you need for your future. This guide provides an overview of how these plans work, their benefits and options, and ways to maximize your contributions so you can make the most of these tax-advantaged retirement accounts.
The time to save is now – don’t delay another day building your retirement wealth and security.
How 403(b) and 457 Plans Work
Work for a non-profit, public school, church, or government agency? 403(b) and 457 plans allow you to save for retirement directly from your paycheck with tax benefits.
Contributions to these plans are excluded from taxable income, so they provide an immediate tax benefit. But the contributions themselves are subject to FICA taxes.
With 403(b) and 457 plans, you specify a percentage of your salary to contribute per pay period. This lowers your taxable income for the year while allowing your money to build tax-free until retirement. At retirement, withdrawals are taxed as ordinary income. Some employers match a portion of your contributions, which enhances your retirement savings.
Benefits of 403(b) and 457 Plans
Two significant benefits of these plans are tax advantages and potential employer matches. Contributing pre-tax money lowers your tax burden now. And tax-deferred growth allows your money to compound over time. If your employer provides matching, take full advantage of it. Their contributions significantly boost your retirement savings.
Tax advantaged retirement planning, 403(b) and 457 plans offer benefits like:
- Pre-tax contributions: Lower your taxable income now by contributing pre-tax dollars. Roth options are after-tax but withdrawals are tax free.
- Tax-deferred growth: Investments grow tax deferred for potentially decades. Pay taxes at withdrawal at your income tax rate at that time.
- Employer matching: Some employers match a percentage of your contributions, providing free money to increase your retirement balance exponentially over time through compounding.
- Higher limits: For 2025, you can contribute up to $23,500 per year to a 403(b) or 457 plan, or $31,000 if over 50, or $34,750 if between ages 60-63. More than IRAs allow.
- Enhanced catch-up contributions: New “super catch-up” contributions of $11,250 are available for those aged 60-63 starting in 2025, in addition to the regular $7,500 catch-up for those 50 and older.
- Investment options: Choose from annuities, mutual funds, ETFs, and sometimes stocks and bonds based on your goals and risk appetite.
- Roth options: Some plans allow after-tax Roth contributions for tax-free qualified withdrawals in retirement. Starting in 2024, Roth accounts are no longer subject to required minimum distributions during your lifetime.
- Emergency withdrawals: Starting in 2024, you can withdraw up to $1,000 annually for emergency expenses without the 10% early withdrawal penalty, with repayment options available.
- Student loan matching: Beginning in 2025, some employers can provide matching contributions based on your qualified student loan payments.
- Loans and hardship withdrawals: Some plans permit borrowing a portion of your balance or withdrawing for financial hardship. Recent changes have made hardship withdrawals more accessible for 403(b) plans.
- Rollovers accepted: You may be able to roll other pre-tax retirement funds like Traditional IRA or 401(k) balances into your 403(b) or 457 plan. Check plan rules first.
New Emergency Withdrawal Provisions
Starting in 2024, both 403(b) and 457 plans offer new emergency withdrawal options:
- Annual limit: Up to $1,000 per year for emergency expenses
- No penalty: The usual 10% early withdrawal penalty is waived
- Self-certification: You determine what constitutes an emergency relating to unforeseeable or immediate financial needs
- Repayment benefits: If you repay within three years, you become eligible for another emergency withdrawal
- Withdrawal restrictions: If not repaid within three years, you cannot take another emergency withdrawal for three years
Mandatory Automatic Enrollment for New Plans
Beginning in 2025, most new 403(b) plans established after December 29, 2022, must include automatic enrollment features:
- Initial rate: Employees automatically enrolled at 3-10% of compensation
- Annual increases: Automatic escalation of 1% annually until reaching 10-15%
- Opt-out option: Employees can choose not to participate or adjust their rate
- Exemptions: Businesses with 10 or fewer employees, businesses less than 3 years old, and governmental plans are exempt
Expanded Participation and New Benefits
Recent changes have made these plans more accessible and flexible:
- Part-time worker eligibility: Starting in 2025, 403(b) plans must allow long-term part-time employees (age 21+ working at least 500 hours for two consecutive years) to participate
- Student loan matching: Employers can now provide matching contributions based on qualified student loan payments, helping younger workers build retirement savings while managing debt
- 529-to-Roth rollovers: Beginning in 2024, unused 529 education funds can be rolled over tax-free to Roth IRAs under specific conditions, providing new flexibility for education savings
Choosing a Provider for Your Plan
Your employer selects companies you can invest with in these plans. Compare providers and their investment options and fees to choose one suited to your needs. Lower fees mean more of your money stays invested for the future.
Maximizing Your Contributions
In 2025, you can contribute up to $23,500 annually to 403(b) and 457 plans, with enhanced catch-up options available. Contribute as much as possible, especially if your employer matches a portion. But be aware of any limits they may place on their matching amount.
- Standard limit: $23,500 to a 403(b) or 457 plan for those under 50
- Age 50+ catch-up: Additional $7,500 (total $31,000)
- Age 60-63 super catch-up: Additional $11,250 (total $34,750) starting in 2025
- Roth options: Same limits apply to Roth 403(b) contributions, which are after-tax but potentially tax-free in retirement
- Multiple plans: If you have both a 401(k) and 403(b), you can contribute the maximum to both
- High earner requirement: Starting in 2026, employees earning over $145,000 must make catch-up contributions on a Roth basis
- Contribution limits for highly compensated: Your contributions may be restricted if you earn over certain thresholds due to nondiscrimination testing
Diverse Investment Options
These plans typically offer mutual funds, annuities, stocks, bonds, and CDs. Work with a financial advisor to craft an investment strategy aligned with your financial goals. They can help you choose options with the best potential returns for your risk tolerance.
- Fixed and variable annuities: Provide guarantees but higher fees. Offer a simple way to generate lifetime income.
- Mutual funds: Hold bonds, stocks or a mix. Returns depend on the markets but fees are often lower than annuities.
- ETFs and managed accounts: Some plans offer ETFs, managed accounts, and brokerage access for those wanting more control and flexibility.
The key is choosing a mix of investments that balances your financial objectives, risk tolerance, and time horizon. Annuities guarantee returns and lifetime income but charge higher fees, reducing your long term returns. Compare all available options, then decide how much to allocate to each. And review your choices periodically to ensure your money is working as hard as possible for you in a way that fits your needs.
Understanding Fees and Keeping Costs Low
Compare fees for investment options and providers as they impact your returns. Lower fees mean more of your money stays invested to grow your retirement savings. Ask about other costs too, like charges to transfer money between investments or providers to avoid surprises.
Enhanced Catch-Up Contributions for Employees Nearing Retirement
403(b) and 457 plans allow enhanced ‘catch-up’ contributions above the standard limits for those nearing retirement age. For 2025, if you are:
- Age 50 or older: Contribute an extra $7,500 to your 403(b) or 457 plan for a total of $31,000
- Ages 60-63: Starting in 2025, contribute an additional “super catch-up” of $11,250 (total $34,750)
- 457 plan special catch-up: In the last 3 taxable years before retirement (age 60-70½), you can defer up to twice the annual contribution limit where prior year under-utilization allows
- 403(b) long-service catch-up: If employed at least 15 years with the same organization and contributed less than $5,000 annually on average, you may qualify for up to $15,000 per year in special catch-up contributions
Enhanced catch-up contributions provide significantly more opportunities to ramp up your saving efforts as retirement nears. Be sure to check with your plan administrator to determine if you qualify and take advantage of any opportunities to maximize your contributions.
Required Minimum Distribution Updates
Recent changes have provided more flexibility for retirement distributions:
- RMD age increase: Required minimum distributions now begin at age 73 (increased from 72), and will increase to age 75 in 2033
- Roth account exemption: Starting in 2024, Roth contributions in 403(b) and 457 plans are no longer subject to RMDs during your lifetime, providing greater flexibility for estate planning
Enhanced Hardship Withdrawal Rules
For 403(b) plans, hardship withdrawal rules have been aligned with 401(k) plans as of 2024:
- Earnings inclusion: Earnings on elective deferrals can now be withdrawn for hardship purposes
- Expanded sources: Qualified nonelective and matching contributions (and earnings) may be included
- No suspension period: The six-month contribution suspension requirement has been eliminated
457(f) Plans for Select Government and Non-Profit Employees
Some government and tax-exempt organizations offer 457(f) plans allowing larger deferred compensation arrangements. But these contributions must stay in the plan until retirement and face significant restrictions.
Deferred compensation plans for state and local governments, 457(f) plans allow public employees to shelter substantial income for retirement. Key differences from 457(b) plans include:
- No contribution limits: Defer as much compensation as you want each year. Deferrals over certain amounts may require approval.
- Substantial risk of forfeiture: You must remain employed for a set period to qualify for the deferred compensation benefits. Leaving earlier means losing benefits.
- Distribution restrictions: Funds typically become available only upon retirement, death, or other specified events.
- Tax treatment: Deferrals reduce current taxable income, with taxation occurring upon distribution.
457(f) plans provide retirement income for those planning to work many years for the same government agency. The ability to defer substantial compensation with tax benefits, despite the risks and restrictions, can generate substantial retirement wealth over time. But these plans are most beneficial when using a long time horizon and maximizing contributions as early and as much as possible.
In Summary
As a public sector employee, you have access to valuable retirement savings plans most people can only dream of. Between your 403(b) and 457 options, you can now contribute even more than before – up to $34,750 annually if you’re between ages 60-63, thanks to recent enhancements. Max out these plans if at all possible. Contribute enough to get any matching offered, then add more whenever you’re able. The tax benefits alone make these plans a no-brainer.
Recent legislative changes have made these plans more flexible and accessible than ever. With new emergency withdrawal options, automatic enrollment for new plans, student loan matching opportunities, and enhanced catch-up contributions, there are more ways to build retirement wealth while maintaining financial flexibility during your working years.
Time is one resource you can’t get back. Whether retirement feels imminent or decades away, start saving aggressively today. Defer as much as these plans allow, choose solid investments suited to your needs, and keep fees low so more of your money works for you. Review your approach regularly and make changes to ensure the strongest returns.
Enhanced catch-up provisions give those closer to retirement an even better chance to reach their goals before time runs out. Older employees, check if you qualify for the new super catch-up contributions and take advantage. For the well-compensated eyeing early retirement, 457(f) plans could shelter hundreds of thousands of tax-deferred dollars if you remain dedicated to your job. But go in with eyes open to the risks.
Public service may not make you rich, but these retirement plans provide a way to build wealth and security for the future. You have options most workers don’t, and recent improvements have made them even more powerful. Seize this opportunity and never look back. Commit to funding your future through consistent saving and prudent investing. Someday, you’ll have the means to walk away from work confident the next chapter of life will be one of possibilities rather than hardship. Your dedication now ensures freedom and stability to come. The future is yours to shape.
