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457(b) and 403(b): the difference that shows up when you leave.

Most FRS members fund one of these for twenty years without anyone explaining how they differ. The difference is largest at exactly the moment it matters.

An older couple on a sofa looking at a laptop together

What they are

Both are tax-deferred accounts you fund from salary, on top of your FRS benefit. Teachers typically have access to a 403(b) and often a 457(b). State and county employees generally have the state's 457(b) through the Bureau of Deferred Compensation.

They are not the pension. They are not part of the pension. Nothing you do in them changes your FRS benefit.

The difference at distribution

Distributions from a governmental 457(b) are not subject to the 10% additional tax on early distributions. Not at 59½. At all. Ordinary income tax still applies.

A 403(b) generally does carry the 10% additional tax before 59½, subject to exceptions.

Separation from service is what makes 457(b) money available to take. So for a member reaching normal retirement at 53, the 457(b) is reachable and the 403(b) generally is not without cost. In the gap years before 59½, that is the whole difference.

Two exceptions worth knowing:

  • Money you rolled into the 457(b) from a 401(k), 403(b), or IRA keeps its original character. It stays subject to the 10% tax.
  • Money you roll out of the 457(b) into an IRA becomes subject to IRA rules. The exemption does not travel with it. If you are going to need that money before 59½, a rollover is the decision that takes it away from you.

Source: IRC §72(t)(1) and §4974(c), which leave a governmental 457(b) outside the 10% tax; §72(t)(2) for the 403(b) exceptions; §72(t)(9) for money rolled in; IRS, Exceptions to tax on early distributions.

Two lanes across a single marker at fifty-nine and a half. The governmental 457(b) lane is reachable on separation from service on both sides of the marker. The 403(b) lane carries the 10 per cent additional tax to the left of the marker and is open to the right of it. 59½ Governmental 457(b) REACHABLE ON SEPARATION FROM SERVICE 403(b) 10% ADDITIONAL TAX OPEN Ordinary income tax applies on both sides of the line.
The one line the difference turns on. Ordinary income tax applies on both sides of it, and a rollover out of the 457(b) gives the exemption up.

The questions that actually come up

Allocation against your timeline. These accounts sit behind a pension that carries no market risk. That changes what role they are playing, and most people have never revisited an allocation chosen on a form years ago.

What happens at retirement. Leave it, roll it, or draw it, and in what order relative to a DROP accumulation and your pension. That is retirement income planning.

Contribution limits and catch-up rules change annually. Confirm current figures with your plan administrator or irs.gov rather than an article.

Important

This page is educational and is not individualized advice. Benowitz Wealth Management is not affiliated with, endorsed by, or sponsored by the Florida Retirement System, the Florida Division of Retirement, or the State Board of Administration of Florida. Confirm the figures that apply to your own record at MyFRS.com or with the Division of Retirement.

Consult a qualified tax professional regarding your specific situation.

Which account you draw first changes the tax bill and how long the money lasts.

Independent, fee-only retirement planning for Florida’s public employees, built around your FRS benefit and everything you’ve built on the side.

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