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Wife and I recently hit our AGI cap and have stopped putting into our Roth IRAs. We already fully fund my 401(k) (generous employer match), so we decided to try to take the money that would have gone into the Roth and invest it in her retirement program. We have not funded her retirement programs at all (no employer match).

She's a school teacher, and she gets the option of both 403(b) and 457(b). Her district has a company that manages both. I called them and said we'd like to start putting into a 403(b) (since I believed it was the non-profit twin of the 401(k)), and the agent there said, "Oh no, you want a 457(b)." "Why?" "Well, you can get all the money out whenever she changes jobs without penalty; with a 403(b) you have to wait until retirement, and you're too young to put money away for that long" (we're 28 & 30)..

Well, this is retirement savings, so I didn't think that mattered. "But otherwise they're exactly the same?" I asked. "Yes."

We had all the paperwork filled out and I had even left the app in the outgoing mail bin at my work when I decided to see what was going on at Fool and read a post about "457 not having the tax advantages of a 403". I snatched the app back (mail hadn't gone out yet) and decided to do some research.

Google for "457 403 comparison" and you will hit at least twenty very similar pages, all from different school districts and all saying that they're basically the same. This is the research I did before filling out the form, and it seemed to me that the agent was being truthful. You'll also notice (at least I did) that if there's any bias, they seem biased to 457. It wasn't until I went on "" and started looking up these terms that I found that the 457 is a NON-QUALIFIED retirement plan. Gee, that seems missing from almost all the information I've gotten from the district.

What does non-qualified mean? Very good question. is too coy to say (at least with my feeble searching abilities). From what little I've pieced together, it seems to me that this is the difference:
- qualified plans can be directly rolled over into an IRA
- non-qualified plans must either take a distribution lump-sum or must be rolled into an annuity

Is this correct? I'm very fuzzy on this--information seems very hard to find.

So that's question #1--what's the difference between qualified & non-qualified retirement plans?

Question #2: Was this guy taking me for a ride, and why? I find it very suspicious that he didn't mention that I'd need to roll this into an annuity instead of an IRA of my choosing, especially since the same company sells (you guessed it) annuities. Keep in mind this company is employed by the school district to manage these benefits AND provide financial advice for teachers. Or maybe I'm seeing slime where there isn't any?

Question #3: Should I fund the 403(b) first and then the 457(b)? Recent tax law changes allow us to do both (that's 3*$13k total tax-deferred savings per year). Is a 403(b) always preferable to a 457(b) assuming the same investment options?

Thanks all for your time, sorry this is so long-winded.

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I am not sure how qualified I am to answer this except that I have a 457 plan. I believe you were given good advice by the school district plan employee. A 457 is slightly superior if you think you are going to change jobs. You can withdraw the money when you leave the employer and not pay a penalty - you do owe the tax however.

In answer to your question about what happens when you leave, it was explained to me that I could either take the money and pay the tax OR leave it in the plan. I could NOT roll it over into my IRA. So the one negative was that I have to keep the money with the firm the government picked to administer the plan and I am stuck with the investment options the plan has as my universe of choices. This was a big problem for me when I started because the selections sucked. They have since hired a new administrator and now offer much better selections from fund houses like T.Rowe Price, Franklin Templeton and Ariel. I do NOT have to roll it into an annuity when I leave this job. I can keep it in the same funds I have now if I choose to leave it in the plan. I can not add to this money however once I leave.

The one question I did not ask [Since I was 33 when I started and have a lifetime til retirement] and which your post has raised for me is, whether or not I can withdraw the money slowly over time or whether I must take it all at once or let it ride. From the information you supplied it may be that when it comes time to withdraw the money you only have the two options, annuity or lump sum and pay the tax. That I do not know.

Hope that helps.

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