When you save for retirement, you may think first of a 401(k). For those who work in public service, education, or nonprofit organizations, two other powerful tools often come into play: the 403(b) and the 457(b).
You can use these two plans together. When you do, the savings potential grows significantly. Let’s look at how each plan works, what makes them unique, and why combining them can accelerate your path to financial independence.
The 403(b) Plan
A 403(b) is a retirement savings plan for employees of public schools, hospitals, churches, and nonprofit organizations. It functions in the same way as a 401(k).
- You receive tax-deferred growth because contributions go in before taxes and reduce your taxable income today.
- The 2025 contribution limit is $23,000 if you are under 50. You can contribute $30,500 if you qualify for the $7,500 catch-up provision.
- You typically invest in mutual funds and annuities.
The 457(b) Plan
A 457(b) is a retirement plan available to state and local government workers as well as some nonprofit employees. Fewer people understand it, but it offers special advantages.
- The contribution limit is also $23,000, with an additional $7,500 catch-up if you are over 50.
- You do not pay a 10 percent early withdrawal penalty. You can access funds penalty-free when you leave your job, regardless of age.
- Some plans allow you to contribute up to twice the annual limit for the three years before your normal retirement age.
The Hidden Advantage: Separate Buckets
The true advantage lies in the fact that the IRS treats the 403(b) and 457(b) as separate contribution buckets.
In 2025 you could contribute:
- $23,000 into a 403(b)
- $23,000 into a 457(b)
- A total of $46,000 or up to $61,000 if you are over 50 and qualify for catch-ups
Most retirement plans share contribution limits. For example, you cannot max out both a 401(k) and a 403(b). However, you can fully fund both a 403(b) and a 457(b). What does this mean?
- 401(k) and 403(b) share a single IRS limit. If you have access to both, the IRS counts your contributions together. So if the limit is $23,000 in 2025 and you put $10,000 into your 401(k), you can only put $13,000 into your 403(b). You cannot contribute $23,000 to each one separately.
- 403(b) and 457(b) have separate IRS limits. The IRS treats these plans as two different “buckets.” That means you can contribute up to the maximum in each account during the same year. If you max out your 403(b) at $23,000, you can still put another $23,000 into your 457(b). Together, that equals $46,000 in contributions.
This makes them a powerful combination for those who can save aggressively.
Tax Advantages in Stereo
When you contribute to both plans, you receive a double tax benefit.
- Immediate Tax Savings
Your contributions lower your taxable income in the year you make them. If you fall in the 24 percent federal bracket, contributing $46,000 could reduce your taxes by more than $11,000. - Tax-Deferred Growth
Both plans allow your investments to compound without taxes on dividends, interest, or capital gains. This accelerates long-term growth compared to a taxable brokerage account. - Flexibility in Retirement
You can withdraw from a 457(b) penalty-free when you leave your job, even if you are not yet 59½. You can let your 403(b) keep growing while you use the 457(b) for early retirement income.
Who Benefits Most
- Educators and school administrators often receive access to both plans, giving them a strong opportunity to save more.
- Healthcare professionals who work in nonprofit hospital systems may qualify for both plans.
- Government workers frequently have 457(b)s in addition to 403(b)s.
- High earners who live below their means can accelerate retirement readiness by contributing to both.
Strategic Considerations
- Contribute enough to receive the full employer match if it exists. This is free money.
- Consider your liquidity needs. Favor the 457(b) if you expect to access funds before age 59½ since you avoid the 10 percent penalty.
- Compare the investment menus in each plan. Using both gives you access to a wider range of funds.
- Coordinate your strategy with other accounts, including IRAs, HSAs, and taxable brokerage accounts. Each account type has its own advantages that complement your retirement savings.
Example: The Power of Doubling Up
Sarah is a 45-year-old teacher. She contributes the maximum to both her 403(b) and her 457(b).
- She saves $46,000 per year for 15 years.
- With an assumed 7 percent annual growth rate, she could accumulate more than $1.1 million more than if she had only maxed out one plan.
What This Means for You
This shows the compounding power of using both accounts together.
When you combine a 403(b) with a 457(b), you unlock a powerful way to supercharge your retirement savings. These plans provide separate contribution limits, flexible access to funds, and significant tax benefits.
If you work in education, healthcare, or government service, review your benefits package carefully. By taking advantage of both plans, you may reach a secure and financially free retirement faster than you thought possible.
Want to talk to a financial advisor? Contact us for a free discovery call.