The 457(b) for Teachers: A Planner's Take Scott Dauenhauer, CFP is well postioned to comment on the 457(b) as it relates to teachers. His planning firm specializes in helping educators. He's the co-author of The 403(b) Wise Guide. And perhaps most importantly, he is married to a teacher.     Educators have yet another decision to make when it comes to retirement planning. As if choosing among dozens of 403(b) vendors wasn't bad enough, they now have to choose which defined contribution plan is best for them, a 403(b) or 457(b) or both! My advice: Don't worry, be happy. Very happy. because you are being given an opportunity that most employees in America will never have.   Thanks to recent tax law changes the 457(b) is now a viable investment option for many educators. School districts across the country are beginning to offer this plan to their employees and you should be aware of the many benefits it has to offer.   The 457(b) is very similar to a 403(b). Contributions are made on a pre-tax basis, and the earnings grow tax deferred until withdrawn at retirement. However, there are some subtle differences between the two plans that may make the 457(b) more attractive than its sister the 403(b). But putting the differences aside, you don't have to choose between the two, you can choose both! You can actually defer up to $14,000 in each plan (in 2004) for a total contributuion of $28,000. Participants eligible for catch-up provisions can include even more.     The governmental 457(b): Same as the 403(b), yet different   No 10% federal tax penalty on withdrawals from a 457(b) upon termination or retirement, regardless of age. The 403(b) has a 10% penalty if withdrawn before age 59 1/2 (with a few exceptions).     The 457(b) has a more liberal "catch-up" option than the 403(b). Under certain circumstances an employee can contribute double the normal limit. This is known as the "final three year" provision.     457(b) plans typically have fewer providers than 403(b) plans which should mean lower cost investment options, better education, and simpler enrollment.     457(b) money can't be transfered to any accepting vendor during employment via a "90-24" transfer like the 403(b) plan.     403(b) plans typically have more liberal hardship withdrawal rules.     One thing I like to take a look at when trying to decide between a 457(b) and a 403(b) is the investment products being offered in each plan. Specifically I look at their fee structure and performance record. Historically, 403(b) plans have been dominated by high-fee insurance investments. This probably has to do with the fact that when the 403(b) was created in 1958 participants could only invest in insurance products. Despite the fact Congress passed a provision in 1974 permitting the investment of mutual funds in the 403(b), most employers overwhelming offer only insurance products, which are typically much more expensive than mutual funds. Perhaps because it was created in 1978, most 457(b) plans are dominated by mutual funds, which are usually much less expensive than most insurance products. For this reason, teachers may find it best to fund their 457(b) to the maximum before committing money to the 403(b).   Scott Dauenhauer, CFP is the founder of Meridian Wealth Management, a fee only financial planning service based in Orange County, California.   Home | Disclaimer | © 2003-2005 bWise Guys, LLC. All rights reserved.