Retirement planning can be complicated, especially for university faculty who have access to both 403(b) and 457(b) plans. While both options offer tax advantages and employer-sponsored savings, they serve different needs depending on your career trajectory and retirement goals.
To illustrate the nuances, let’s look at three different professors, each with unique financial circumstances.
Dr. Emily Carter – The Early Retirement Seeker
At 50 years old, Dr. Emily Carter has spent most of her career as an associate professor at a public university. She’s financially stable and has no plans to work beyond 55. Unlike many of her colleagues who assume they need to wait until their 60s to retire comfortably, she has been diligently saving and is now strategizing how to access her funds in the most tax-efficient way.
Her university offers both a 403(b) and a 457(b) plan, but only the 403(b) comes with a 5% employer match. Logically, many would assume she should prioritize the 403(b) first to take advantage of free money. But there’s a problem: withdrawals from a 403(b) before age 59½ come with a 10% penalty unless she qualifies for an exemption. That means if she maxes out her savings in a 403(b), she’ll have to wait nearly five years before she can use those funds without a penalty.
On the other hand, the 457(b) plan allows penalty-free withdrawals at any age once she separates from service. This is a game-changer. Because she’s retiring at 55, her strategy shifts. Instead of maxing out her 403(b) first, she decides to prioritize her 457(b) contributions to ensure she has penalty-free access to those funds. She still contributes enough to her 403(b) to get the 5% match, but anything beyond that goes into her 457(b).
For Dr. Carter, the key was understanding that even though both plans look similar at first glance, their withdrawal rules are very different. Had she maxed out her 403(b) without thinking ahead, she might have needed to delay her retirement or face unnecessary penalties. By focusing on her 457(b) first, she ensures that she can retire at 55 and still have access to her money without financial stress.
Dr. Marcus Patel – The Late-Career Saver
Dr. Marcus Patel is 58 years old and has been working as a senior researcher at a state university for most of his career. His retirement savings, however, aren’t where he’d like them to be. He had spent much of his early career paying off student loans and supporting his family, leaving little room to invest in retirement. Now, with retirement on the horizon, he wants to maximize his contributions as much as possible in his final years of employment.
Luckily, his 457(b) plan has a special catch-up provision that allows employees within three years of retirement to contribute up to $46,000 instead of the standard $23,000 limit. This means he can more than double his savings in his final years, helping him make up for lost time.
Dr. Patel’s university also offers a 403(b) with no employer match, which means there’s no immediate financial incentive to contribute there first. Given that, he decides to max out his 457(b) with the special catch-up provision first, bringing his contributions up to $46,000 in one year. He then contributes another $23,000 to his 403(b). In total, he’s deferring $69,000 in taxes per year, an aggressive move but one that will give him a much stronger financial position when he retires.
For Dr. Patel, the decision was simple: take advantage of every possible catch-up opportunity. The 457(b) special catch-up rule is unique, and not many people realize just how much extra they can contribute in their final working years. His decision ensures that when he retires at 62, he’ll have significantly more tax-advantaged savings to draw from.
Dr. Ana Rodriguez – The Long-Term Investor
At 40 years old, Dr. Ana Rodriguez is a tenured professor at a large research university. She loves her work and plans to stay in academia for the long haul, potentially into her late 60s. Unlike Dr. Carter, she has no plans for early retirement. Unlike Dr. Patel, she isn’t playing catch-up. Instead, her focus is building a strong, tax-diversified portfolio so that when she does retire, she has a mix of taxable, tax-deferred, and tax-free income sources to pull from.
Her employer offers both a 403(b) and a 457(b) plan, with a 6% match on the 403(b). Since employer matches are essentially free money, her first priority is maxing out her 403(b) contributions to take full advantage of that match. After that, she moves on to her 457(b), contributing additional funds there.
But Dr. Rodriguez isn’t just thinking about how much she saves, she’s also thinking about how she’ll be taxed in retirement. If she puts everything into traditional pre-tax accounts, she may end up in a high tax bracket in retirement, leaving her with a hefty tax bill when she starts withdrawing funds. To prevent this, she splits her contributions between pre-tax and Roth accounts within both her 403(b) and 457(b) plans.
By doing this, she ensures that when she reaches retirement, she has a mix of tax-free Roth money, tax-deferred traditional funds, and taxable brokerage investments, giving her maximum flexibility. If tax rates go up in the future, she’ll be grateful for her Roth savings. If she needs cash before she’s eligible for penalty-free withdrawals, her taxable brokerage account will be available.
For Dr. Rodriguez, retirement planning isn’t just about saving the most money, it’s about structuring her savings in a way that gives her the most options down the road.
Final Thoughts: There’s No One-Size-Fits-All Plan
What makes 403(b) and 457(b) plans so unique is that they can serve very different purposes depending on your retirement goals.
- Dr. Carter needed early access to her money, so she focused on the 457(b) first.
- Dr. Patel needed to maximize contributions in his final years, so he took advantage of the 457(b) catch-up provision.
- Dr. Rodriguez wanted tax diversification, so she balanced her contributions across pre-tax and Roth accounts.
Each strategy was different, but each was correct for that individual’s situation. The key is knowing what you want out of your retirement plan and structuring your contributions accordingly.
If you’re a university professor or faculty member looking to make sense of how to best use your 403(b) and 457(b) plans, let’s talk. The right strategy today can make all the difference for your financial future.