403(b) and 457(b) plans

Not everyone has a 401(k). Public school teachers, nonprofit employees, and government workers often have 403(b) or 457(b) plans instead. They function similarly to a 401(k) but have important differences — and the 457(b) in particular has one feature that makes it arguably the best retirement account available to public employees.

403(b)

Used by nonprofits, schools, and some religious organizations. Contribution limits match 401(k)s ($24,500 in 2026). The main historical quirk is that 403(b) plans have often been sold through high-fee insurance annuities instead of low-cost mutual funds — you may need to dig through your plan options to find the good choices. Look for the 'vendors' list and pick the one offering actual mutual funds (Vanguard, Fidelity) rather than variable annuity products.

457(b)

Used by state and local government employees and some nonprofits. Contribution limit is the same $23,500. Here's the amazing feature: 457(b) plans have no early withdrawal penalty once you separate from service, regardless of your age. If you leave your government job at 52, you can withdraw from your 457(b) immediately, no penalty, no substantially-equal-periodic-payments complexity. This is unique.

The 403(b) vendor problem, in dollars

The 403(b) world grew out of insurance sales to teachers, and it shows. Many district vendor lists still feature variable annuities charging 2%+ all-in, sold by reps who visit the teachers' lounge. The damage compounds brutally: a teacher contributing $500 a month for 30 years at 7% market returns ends with about $588,000 in a 0.1%-fee index fund, versus roughly $413,000 in a 2%-fee annuity product (estimates). Same paychecks, same market — $175,000 paid for the privilege of being sold to. If your vendor list includes Fidelity, Vanguard, or a state-run low-cost option, choose it; if it doesn't, ask your district to add one, and consider capping the 403(b) at any match while funding an IRA first.

Why the 457(b) changes early-retirement math

The no-penalty-after-separation rule makes the 457(b) the perfect bridge account for anyone who might leave public service before 59½. A teacher-and-firefighter couple who each spent 25 years contributing can retire at 52 and live on 457(b) withdrawals immediately — no Rule of 55 gymnastics, no SEPP handcuffs, no Roth ladder seasoning. Ordinary income tax still applies, but the 10% penalty that traps everyone else's money simply doesn't exist here. If early retirement is even a possibility, prioritize the 457(b) over the 403(b) once any match is captured: the dollars are identical except one set unlocks seven years sooner.

Common mistakes

• Defaulting to the vendor with the friendliest salesperson instead of the cheapest funds — the single costliest 403(b) decision.
• Not realizing the 403(b) and 457(b) limits stack, leaving a second $23,500 of tax-advantaged space unused during peak earning years.
• Rolling a 457(b) into an IRA at retirement before 59½ — this destroys the penalty-free access that makes the account special.
• Loading a non-governmental 457(b) without weighing the employer's financial health.
• Assuming the pension makes personal saving unnecessary. Pension formulas reward full careers; anyone who might leave mid-career needs their own balance too.

If you're starting from zero, the order of operations for a public employee looks like this: capture any match in either plan first, then fund the governmental 457(b) toward its limit, then a Roth IRA, then the 403(b) with the cheapest vendor on the list. Along the way, verify your pension's vesting schedule and what happens to your contributions if you leave early — that answer changes how much personal saving your plan really needs.

The bottom line: public-sector and nonprofit workers get a genuinely better toolkit than most private employees — double contribution space and an account with no early-withdrawal penalty — but it's wrapped in worse packaging, with high-fee vendors and unadvertised rules. Pick the low-cost vendor, stack both limits if you can, favor the governmental 457(b) if you might retire early, and let the pension be the floor rather than the plan.

One closing encouragement for teachers especially: the difference between the best and worst choices on a typical 403(b) vendor list is larger than almost any other single financial decision you'll make — bigger than most people's stock-picking, timing, or budgeting efforts combined. An hour spent identifying the index-fund vendor and moving future contributions there pays a five-to-six-figure lifetime dividend. Few hours of adult life compensate that well.