403(b) vs 457(b) for Teachers: The Green State Credit Union Checklist

Extra money belongs in the 457(b) because it has no penalty

A colleague told Denise (hypothetical), a 56-year-old middle-school science teacher with 29 years of service, to push every spare dollar into the 457(b) before retiring at 57. She has $410,000 in a 403(b) and $120,000 in a 457(b), and she helps pay for her mother's assisted living, so access matters to her.

The rule: governmental 457(b) withdrawals after you separate from service avoid the 10 percent additional tax at any age. A 403(b) avoids it too if you separate during the calendar year you turn 55 or later and keep your balance in that 403(b). Denise leaves at 57, so both plans are penalty-free once she separates. For her, the order is worth a fund-cost comparison and not much more. She pulled the expense ratios from both menus and compared those.

The 457(b) matters most to someone leaving before the year they turn 55. Someone leaving later gives up little by choosing the 403(b) if its funds are cheaper. Rolling either plan into an IRA before 59½ brings back the IRA's 10 percent penalty on most withdrawals.

Both plans share one $24,500 limit

Denise's payroll clerk said so, and it's wrong for her plans. The IRS sets a separate $24,500 limit for the 403(b) and the governmental 457(b) for 2026. At 56, Denise can defer $24,500 plus the $8,000 catch-up into each plan: $32,500 × 2 = $65,000. If she teaches until 60, the higher catch-up for ages 60 to 63 gives $24,500 + $11,250 = $35,750 per plan, or $71,500 for both. The 403(b) 15-year service catch-up and the 457(b) final-three-years catch-up follow their own rules, so ask the plan which applies and check the current IRS limit.

My heirs get the same thing whichever plan I fill

Denise asked who gets what she doesn't spend. The plan label hardly changes an heir's tax. Pre-tax money in either plan is taxed to the beneficiary, and most adult non-spouse beneficiaries must empty an inherited account within 10 years. Roth money that meets the five-year rule comes out tax-free.

Here is her math. She saves $32,500 a year, all pre-tax, which saves $7,150 in tax at an assumed 22 percent rate ($32,500 × 0.22). Moving $12,500 to a Roth option leaves $20,000 pre-tax, so the savings fall to $4,400 ($20,000 × 0.22). That's a $2,750 cost now. If the $12,500 is never spent, an adult non-spouse heir would owe $3,000 on it as pre-tax money ($12,500 × 0.24, assumed rate). As Roth, the heir owes nothing on it.

Pre-tax saving shifts the tax to someone else. It doesn't erase it. The table shows that penalty-free access is the same in both columns, and only the tax type moves. Swap in your own tax rate and Roth amount in our calculator to see your version.

The honest limit: if assisted-living costs for Denise's mother use up the money, the heir math never happens. So Green State Credit Union looks at expected spending from savings before suggesting any Roth shift. Denise decided to send $12,500 to the Roth option and keep $20,000 pre-tax, as in the table. That is more than her $8,000 catch-up alone. Investments in either plan can drop in value, and that includes what she put in.

The arithmetic

Where the heir math stops

What does the IRS early-withdrawal rule actually say about a 457(b)?

The IRS 10 percent additional tax doesn't apply to governmental 457(b) distributions, with one exception: amounts rolled in from a 403(b), 401(k) or IRA keep their original penalty treatment. People paraphrase this as "the 457(b) has no penalty," which is too broad if you ever rolled money in.

The rule of 55 gets the same shortcut. People say you can retire at 55. The official rule is that separation from service must happen during or after the calendar year you turn 55, and it covers only the plan of the employer you left. That plan is the 403(b), not an IRA it was later rolled into.

The calendar that decides where the next dollar goes

The last paycheck in December is the deadline for that year's deferrals. In January, your W-2 shows them in Box 12: code E for the 403(b), code G for the governmental 457(b). Compare both against your elections. A payroll office that treats the plans as sharing one $24,500 limit may stop your 457(b) deferrals mid-year. An $8,000 shortfall means about $1,760 more tax that year at an assumed 22 percent rate, and the unused room is gone once the year closes. Check Box 12 or the year-to-date lines on your November pay stub.

Age milestones, in order:

• 50: $8,000 catch-up opens for the whole year
• 55: separation year that frees the 403(b)
• 59½: IRA penalty ends
• 60 to 63: $11,250 catch-up window
• 73 or 75: RMDs start (75 for Denise, born 1960 or later)

Four questions for the district benefits office and a CPA

If your prior-year FICA wages exceeded $150,000, catch-ups must go in as Roth. Many teachers in pension-only systems should ask payroll how this applies to their wages. Bring these to the benefits office and a CPA:

• Does our plan offer a Roth option, and can I split one contribution between Roth and pre-tax?
• Does payroll track the 403(b) and 457(b) limits separately, or stop one plan when the other hits $24,500?
• Which catch-up can I use this year: age 50, ages 60 to 63, 403(b) 15-year service, or 457(b) final three years?
• CPA: at my expected retirement tax rate, does pre-tax or Roth leave more for me and my heirs?

What you can split yourself and when Green State Credit Union helps

You can check your W-2 codes, compare fund costs on both menus and set the deferral split on your own. The Roth-versus-pre-tax question, weighed against your pension start date and family costs, is the part worth an intro call with Green State Credit Union. This page covers governmental 457(b) plans only; a 457(b) from a tax-exempt employer has different rules, and state tax on withdrawals varies.