Ch. 14:  401(a), 403(b), and 457(b) Plans

14.0 Introduction

            Three plans, one chapter.  Like their cousin, the 401(k), 401(a), 403(b), and 457(b) plans are retirement vehicles that allow investors to avoid taxes while saving for retirement.  While 401(k) plans are primarily available to individuals working for for-profit firms, these three plans are most commonly provided by government employers.  Since about 22 million Americans[1] work for a local, state, or the US federal government, there’s a good chance that you will be connected to one of these plans at some during your life, either directly (you land a government job) or indirectly (you help a friend or family member who is employed by a government).  Don’t worry.  This is an easy chapter.

14.1 401(a) Plan

            Among the 4XX plans, the 401(a) is certainly the most unique.  While technically available to for-profit firms, 401(a) plans it’s rare.  If you happen to work for a for-profit firm that offers a 401(a), this will be your only 4XX plan—you are not permitted to have both a 401(k) and a 401(a).  There’s not a lot of information online about these plans.  See for yourself:  The Wikipedia entry for 401(a) plans is short and useless.[2]  Strange.  Here are the rules related to this unusual tax shelter.

Rules for 401(a) Plans

1.  Employees have no control over their contribution amount.  If you are included in a 401(a) plan, your contribution amount is based on your salary and cannot be altered. 

This is totally unique to 401(a) plans.  The University System of Georgia, for example, allows employees to choose either a 401(a) plan or a pension.[3]  Those choosing the ORP plan automatically contribute exactly 6% of their salary. 

2.  Employers must contribute to an employee’s 401(a) plan.  Most 401(a) plans have a fixed company match.

401(a) plans always have a “company match” although that term is a bit of a misnomer.  If you have a 401(a), you will be required to contribute X to your plan annually (where X is a typically a % of your salary) and your employer will contribute Y (usually also a percent of your salary).  These values—X and Y—are the same for all employees.  In the University System of Georgia 401(a) plan, employees contribute 6% and employers contribute 9.24%. 

3.  The total contribution limit is not relevant unless you have a huge salary.

The annual contribution limit for the 401(a) is $70,000 in 2025.  This annual contribution limit is the combined maximum for employee and employer contributions.  Since employees have no control over their contribution amount, it takes an extremely high salary to reach this threshold.  In the aforementioned University System of Georgia 401(a) plan, this $70,000 threshold would only be reached if an employer earned a salary in excess of $450,000.

4.  401(a) plans are always traditional in nature

As far as I know, there is no such thing as a “Roth” 401(a).  As such, anyone with a substantial 401(a) plan will likely need to make Roth investments via another shelter, such as a Roth IRA, to achieve a mixture of traditional and Roth vehicles in their portfolio.  Like traditional 401(k) plans, contribution to a 401(a) always reduce federal and state income taxes (but not Social Security or Medicare taxes).

5.  401(a) plan investment options vary by employer and vendor

401(a) plans are permitted to have the same investment options as 401(k), so you should expect to see mutual funds, index funds, and target date funds among your investment options.  Individual stocks and individual bonds are not available in 401(a) or any 4XX plan.  Unfortunately, many 401(a) plans, especially for local governments and non-profits, contain some truly awful investment options.  Because employees have no control over their contribution amount, this can be extremely frustrating.  Imagine contributing 5% of your income to a sleezy vendor charging load fees and a 2% expense ratio during a 30-year career.  Ouch.

6.  401(a) plans have pretty much the same withdrawal rules as 401(k).

You can withdraw from these plans beginning at age 59.5.  Since 401(a) plans are always traditional, your withdraw will be taxed as income.  That’s okay!  Remember that the only plan that can easily avoid all taxes is the HSA.  401(a) plans avoid taxes once, just like traditional 401(k), traditional IRAs, and others.  As with 401(k) plans, 401(a)’s have hardship withdrawal options.  Glance back at chapter 13 if you want more information.

14.2. 403(b) and 457(b) Plans

These shelters are quite similar to 401(k) plans.  The 403(b), in particular, is practically a 401(k) clone.  Let’s first look at the rules that these two plans share in common before delving into the cool features of 457(b) plans.

Rules for both 403(b) and 457(b) Plans

1.  Employees choose how much they want to contribute.

In almost all cases, these two plans are just like 401(k).  You are not obligated to contribute to your 403(b) or 457(b).  It’s your choice how much to contribute, if any.

2.  Employer matches are permitted but not ubiquitous.

Employers are generally allowed to contribute to employee plans, but it’s not terribly common.  Why?  Part of the reason is because….

3.  A person can contribute to a 401(a), 403(b), and a 457(b) at the same time![4]

It’s great to be a government employee.  My wife, who is a marketing lecturer, has a 401(a), 403(b) and a 457(b).  Thus, she can contribute an absurd amount of money to tax shelters if she is so inclined.  This is not always the case, however.  Some government entities and non-profits offer just one or two of these accounts (for whatever reason).  For state and federal government employees, however, you usually get all three.  Since such employers are already providing an employee match in a 401(a), they don’t typically offer matching in the other plans.

4.  The total contribution limits are the same for 401(k), 403(b), and 457(b) plans

$23,500 in 2025.  These limits apply to each fund individually.  My wife could simultaneously contribute $23,500 to her 403(b) and $23,500 to her 457(b) in 2025.

5.  These plans can be traditional or Roth

Note that they can be.  Some entities simply don’t allow Roth contributions for whatever reason.  If your government/agency doesn’t offer a Roth plan, complain.  This is the kind of change that is easy to implement and maybe you’re just the first person to advocate for Roth options.

6.  Investment options vary by employer and vendor

As with 401(a), your investment options could be bad and there’s little you can do about it.  Before making 403(b) or 457(b) contributions, look at the investment options.  Some plans have such high fees that you’re better off just using a brokerage account.  Specifically, if expense ratios exceed 1%, a case can be made to avoid these plans altogether.  Remember that everyone can contribute to a Roth IRA and an HSA[5] so you can have tax-sheltered investments without using a 403(b) or 457(b).  Why do 403(b), 457(b), and 401(a) sometimes have such bad options?  One answer is the choice of vendor. 401(k) plans are usually run by investment firms while the other plans are often administered by insurance companies.  Also, many of the entities—small non-profits and local governments—offering these plans simply don’t have the brainpower to carefully avoid bad plans.  Some sleezy insurance firm will offer to set up a 403(b) plan and the unknowing local government rep with sign-off without considering fees at all.  For-profit firms usually have the savviness to avoid such fleecing.  

7.  Catch-up contributions are permitted

As with 401(k) plans, these two shelters allow those over 50 to make extra contributions of $7,500 (for a total of $31,000) in 2025.  Some 457(b) plans also allow for a double-catch-up.  In the three years prior to retirement a person can contribute twice the regular maximum ($47,000 in 2025).  Why is everything so damn complicated?!

Rules specific to the 403(b) plan

403(b) plans are seriously just like 401(k) plans.  Look back at Chapter 13 if you need to learn more about 403(b) plans.  The only difference is in who has access.  401(k) plans are generally available to for-profit organizations, while 403(b) plans are for tax-exempt organizations and governments.  While the rules are the same, the substance differs.  Remember that 403(b) plans often provide bad investment options; I’ve heard that some only include annuities.  I’ll write a future article here about annuities.  For now, just know that you should avoid annuities like the plague. 

Rules specific to the 457(b) plan

457(b) plans have a lot in common with their peer plans.  But there are a few key differences.  This first one is a big deal.

1.      Participants can withdraw from a 457(b) as soon as they leave their job

This is a huge benefit that is totally unique to the 457(b) plan.  When you leave your job—for any reason—you can immediately withdraw funds at any age for any reason without facing an early withdrawal penalty.  Let’s say a public government employee who has been contributing to a 457(b) account takes a one-year break from work at age 40 to travel the world.  As such, they will have no income.  This year would be a perfect time to make withdrawals from their traditional 457(b)!  While their income is zero, they can make withdrawals and pay very low tax rates.  This feature deserves more attention.  We’ll get back to this topic in section 14.3

2.      If you keep working at the same firm, you cannot withdraw until 65

This is such a weird rule.  For the other plans discussed, one can withdraw penalty-free at age 59.5.  If you leave your job, you can withdraw from a 457(b) at any age, but if you maintain your job, you must wait until age 65.  Personally, I don’t think this is an important rule for most folks.  If you’re still working, you probably don’t need to withdraw money from a retirement account, right?

3.      A 457(b) plan is technically not yours

Unlike all other plans discussed, a 457(b) fund is not yours until you collect it.  I’m 38 years-old and have six-figures held in a 457(b).  This money is not mine; rather, it’s the state of Georgia’s (my employer).  If the state of Georgia gets sued or declares bankruptcy, there is some chance I lose “my” money.  As a state employee, I’m not worried.  My invested funds are held in a trust and it is extremely unlikely that I have any problems withdrawing.  This is a total non-issue. 

But what if I worked for a small non-profit, like a church, hospital, or private school?  Now I would be a bit concerned.  If these entities owe money to someone and run out of cash, it’s plausible that creditors could siphon money from employee 457(b) accounts.  Is this common?  No.  In fact, I can’t find any examples of this occurring in the real world through my search engine queries.  Nonetheless, I think it matters.  If I were offered a non-governmental 457(b), I would probably contribute, but I would make sure that I have money in other accounts too.  A person on track to retire with, say, $2m in a non-government 457(b) (and no other assets) is taking an unnecessary risk.

4.      Some 457(b) have bizarre withdrawal rules

From my readings, I’ve found indicates that some 457(b) require lump-sum all-at-once withdrawals.  If an investor wants to withdraw money from their 457(b), they must do so all at one time!  That’s crazy!  This apparently only happens with non-governmental 457(b) plans.  If you work for an entity that offers such a plan, you’ll want to do some digging before making contributions.

14.3 Using a 457(b) plan optimally.

            Because investors can withdraw from a 457(b) immediately upon separating from their employer (i.e. quitting, getting fired, etc.), this retirement vehicle offers unique value to employees that are lucky enough to access one.  In particular, folks that plan to “retire early” can use a 457(b) to drastically reduce their lifetime taxes. 

Let’s construct an example of how this would work.  I’ll try to keep things as simple as possible for our purposes.  Let’s say a public-school teacher (Grant) earns $57,150 every year from age 23 to 53 and then retires.  During his working years, he has access to a 403(b) and no other plans employer-provided plans.  Assuming tax brackets remain constant, Grant has $10,000 worth of income that will fall into the 22% tax bracket.  Ideally, he would like to contribute $10,000 to his traditional 403(b), which would result in a total taxable income of $57,150.[6]  Then, he can withdraw from this account during retirement.  For someone retiring after age 59.5, this will work just fine!  But Grant is retiring at 53.  The 403(b) isn’t sufficient.  He needs to have a source of income from age 53 to 59.5, which the 403(b) cannot provide without paying a 10% early withdrawal penalty.[7]  This likely means contributing to a brokerage account during his working years, which avoids no taxes during contribution.  Thus, he will be stuck paying a 22% tax on a portion of his income during his working years.

What if Grant had a 457(b)?  Now retirement planning is a breeze!  Grant can contribute $10,000 to his 457(b) account every year and when he retires, he can immediately access funds at any age.  This is great!  Grant can contribute to his traditional 457(b) during his working years, avoiding the 22% bracket.  Then, he can withdraw exactly $47,150 from this 457(b) every year during retirement, paying only the 10% and 12% tax bracket!  Take a look below.

By contributing $10,000/yr from age 23 to 52, Grant should have in excess of $1 million in his 457(b) by the time he reaches age 53.  In doing so, he “smooths-out” his income, generating $47,150 in taxable income each year, the maximum income that still avoids the 22% bracket. 

            Cases like Grant show why 457(b) plans are especially useful when the investor prefers traditional contributions.  If Grant had instead elected to make only Roth 457(b) contributions, he would generate no income during his retirement years.[8]  As a result, he would be paying a 22% tax rate on a portion of his income during his working years and then paying no taxes at all during retirement—this is extremely inefficient. 

            457(b) plans also serve as a unique version of an emergency fund.  It’s been a while since we’ve discussed this topic, so let me re-introduce it.  An emergency fund is a simple account that is liquid and often not invested in any risky assets.  For example, you might decide to keep $30,000 in a savings account that can be quickly withdrawn if you need to pay for a major medical bill, buy a used car quickly, etc.  The benefit of such an account is clear—we all need to have cash available—and hopefully, at this point in your learnings, you can also see the cost.  Savings accounts generate paltry returns; thus, tying-up cash in a savings account can adversely impact your ability to build wealth.  A 457(b) serves as one piece in the puzzle of a plan to completely divorce yourself from a low-interest emergency fund.  I’ll glaze my financial situation for a second.  My wife and I have $290,000 in traditional 457(b) accounts, $50,000 in an HSA, $90,000 in our Roth IRAs.  If we lose our jobs, we can withdraw from my traditional 457(b).[9] If I have a costly medical expense, we can use our HSA, and if I have any other major expense, I can withdraw contributions my Roth IRA.[10]  And we have enough saved up that we don’t need to keep any money in a risk-free/low-interest account: We can weather a stock market crash without putting ourselves in a dire financial situation. 

Obviously, it took me some time to get to this point in my life.  I’m 38 years old and worked hard to save and invest as much as possible during my late-20s and early 30s.  But I didn’t do anything special.  Our combined incomes have not exceeded $200,000 in any year.  By using our tax shelters wisely, we have no typical emergency fund and nearly all our money is invested.  You’re probably younger than me and need an emergency fund to cover life’s little messes; that’s normal and smart!  But as you get older and build wealth, maybe you can kick that boring low-interest emergency fund to the curb.  This is controversial advice, to be clear.  Just about every professional financial planner will advise you to have the old boring savings account emergency fund, but I think these planners are trying to cover their ass.  If you have roughly two years or more in expenses[4] held in accessible investment accounts, you can think about dropping your savings account emergency fund.  A 457(b) makes this so much easier.  If you only have, say, a 401(k), then you don’t have any easily accessible funds in the case of a layoff. 

14.4 Conclusions

            One of the most frustrating things about building personal financial knowledge is the sheer amount of content that you may or may not need.  I have never had a 401(k) and likely never will.  You may never have a 457(b).  But I must teach it and you need to learn it.  It be that way sometimes.  Remember that this content is designed to not only provide practical guidance for your financial journey, but was also designed with the expectation that you will help others.  Maybe your Mom works for the government.  Ask her about her retirement plans—see if she is taking advantage of her 457(b).  From my experience, most folks are leaving so much money on the table due to ignorance.  This sucks, but it creates a massive opportunity.  You can improve others’ lives just by giving a bit of your time and brainpower. 

End Notes

[1] Source. 

[2] Source.

[3] Or technically, a worker could choose neither.  But that would be Donnie-dumbass-level dumb.

[4] It’s also possible to have a 401(k) and one of the other plans simultaneously but it’s rare.  If you have a 401(k), it’s unlikely you’ll have any of the other plans.

[5] But you must have a high deductible health insurance plan.

[6] The employee can allocate additional retirement savings to Roth accounts since they are now in the 12% income tax bracket.

[7] To be honest, there is a way to withdraw funds starting at 54.5 using what’s called a 72(t) distribution.  But is a big mess and a mistake can be very costly.  And furthermore, it still doesn’t fully address the problem since he plans to retire at 53.  Learn more about 72(t) distributions here is you are a glutton for punishment: Source.

[8] Well, no income until Social Security payments begin.

[9] This will be very tax efficient.  Since I will have no income, I can withdraw at a low tax rate.

[10] We also have $70,000 in a brokerage account, but I’m trying to show how one could really take advantage of tax shelters.  If we were more aggressive with our tax planning, I could hold a lot less in my brokerage account. 

[11] For example, if you spend $60,000/year and have $120,000 that can be withdrawn in the case of an emergency, I think it’s time to at least consider reducing or dropping your savings account emergency fund.  This likely means having far more than $120,000 in total assets.  For example, if you have $50,000 in a Roth IRA, of which $30,000 is contributions, then you really only have $30,000 in accessible funds. 

Key Terms

Annuities:  Pension-like investment option that converts a chunk of money today into an income stream in the future.  For example, you might be able to pay $100,000 now to receive a $7,000 annuity for the next 20 years.  There’s nothing inherently wrong with annuities, conceptually, but they effectively generate extremely small returns for the purchaser.  Avoid!

Emergency Fund:  Safe, liquid fund that is available for unexpected financial expenses, like a car repair and the like.  Almost all financial experts advise everyone to have an emergency fund, typically held in a savings account.  With careful planning, I think it’s reasonable to drop your emergency fund if you have grown your net worth to a sizeable level and have created ways to access your retirement accounts in case of an emergency.

4XX Plan:  This isn’t a technical term or anything, but I think it’s useful.  4XX refers to the 401(k), 401(a), 403(b), and 457(b) plans.

401(a) Plan:  Read the chapter you bum

403(b) Plan:  Read the chapter you bum

457(b) Plan:  Read the chapter you bum

Practice Problems

1. Jane works for a non-profit that offers an investment plan that Jane doesn’t understand.  She earns $60,000 in 2025 and is “forced” to contribute 4% of her salary to a retirement plan.  Her company contributes 6% of her salary to the same plan.  What kind of retirement plan does this sound like to you?

401(a).  These plans have a fixed employee and employer contribution. 

2. Brayden earns $94,000 in 2025, working for the state of Virginia.  He has access to a 403(b) and a 457(b).  He plans to retire at age 48.  If he plans to contribute $20,000 to retirement accounts this year, which of these plans would be better?  Should his contributions be traditional or Roth?  Explain.

Traditional 457(b).  He will have many years of no income from a job.  So, he would like to earn income during his retirement period so that he can create taxable income when he is in the lowest possible tax bracket.  In other words, he can make traditional contributions now (avoiding 22% bracket) and then withdraw from these accounts during retirement at lower (10% or 12%) tax brackets.  Why a 457(b)?  Because he can withdraw from this vehicle immediately after quitting his job.

a.      How might your answer be different if he worked for a small private non-profit hospital?

457(b) accounts are technically owned by the employer, not the employee.  If the hospital is sued or goes bankrupt, it’s plausible that his 457(b) account is syphoned by creditors.  As such, it’s probably a good idea to not only contribution to the 457(b), but use other vehicles such as the 403(b) or other accounts available to everyone (IRA or HSA).

3. A married couple earns $167,000 in combined income.  In 2025, they contribute $16,000 to traditional 457(b) plans, $5,000 to an HSA, and $10,000 to a Roth IRA.  Solve for their…

a.      Federal Income Taxes

Taxable Income = $167,000 - $16,000 - $5,000 = $146,000

Income Taxes = $21,948

b.     Social Security Taxes

SS Income = $167,000 - $5,000 = $162,000

SS Taxes = $162,000(0.062) = $10,044

c.      Medicare Taxes

Medicare Income = $167,000 - $5,000 = $162,000

Medicare Taxes = $162,000(0.0145) = $2,349

4. Nancy is single and 44 years old.  She is retired and has no regular income.  In 2025, she withdraws $50,000 from a traditional 457(b).  Solve for her…

a.      Federal Income Taxes

Taxable Income = $50,000

Income Taxes = $5,914

b.     Social Security Taxes

$0.  Withdraws from tax shelters never generate SS taxes.

c.      Medicare Taxes

$0.  Withdraws from tax shelters never generate Medicare taxes.

5. Wynona is single and 44 years old.  She is retired.  In 2025, she withdraws $50,000 from a Roth 457(b). 

a.      Solve for her federal income taxes

$0.  Since she is withdrawing from a Roth account, she does not pay taxes.

b.     Solve for her Social Security taxes

$0.  Withdraws from tax shelters never generate SS taxes.

c.      Solve for her Medicare taxes

$0.  Withdraws from tax shelters never generate Medicare taxes.

d.     Explain why this is not a good tax planning scenario.

When she earned her income initially and opted to contribute to a Roth account, she was choosing to be fully taxes on that income.  Today, she is in the lowest possible tax bracket and she is not earning any income.  She’s missing out on a huge opportunity!  When she was working, she should have contributed some money to traditional accounts (avoid income taxes then) so that she can withdraw from those accounts now when she has no other income (choose to pay income taxes now). 

6. If I work for a for-profit firm, am I likely to have a 401(a), 403(b), or a 457(b)?  Explain.

No.  It’s unlikely that you will have any of these accounts.  There are some for-profit firms that offer 457(b) accounts, but that’s extremely rare.  If you work for a for-profit firm, expect to have access to a 401(k) and no other 4XX account.

7. Jake is 33 and earns $110,000 working for the federal government.  In 2025, he automatically contributes $14,000 to his 401(a).  He has access to a 403(b) and a 457(b).  How much is he allowed to contribute to these accounts this year?  Explain.

Unless there are strange rules at his company, he can max-out both his 403(b) and 457(b).  So, he could contribute $23,500 to each for a total of $47,000.

8. Marcus has two competing job offers.  The state of Ohio is offering him $66,000/yr., while a private for-profit manufacturing firm is also offering $66,000/yr.  These jobs seem almost identical.  While discussing his decision, Marcus mentions that he would like to retire very early, “perhaps at age 40”.  Based on this information, provide some guidance for Marcus.

The state of Ohio job probably offers a 457(b) plan (he should investigate).  Since one can withdraw from 457(b) accounts immediately after leaving their job, Marcus, who plans to retire early, could really make use of this account.

9. Josephine has $600,000 in a 403(b) that charges very high fees.  She is 56 and retired.  What should she do to avoid the fees?

She should consider a rollover IRA.  Remember how 401(k) accounts can be rolled over into IRAs?  The same is usually an option for the other 4XX accounts.  By rolling her 403(b) into an IRA, she can choose her vendor and find low cost options.