403b vs 457b - Which One Should Attendings Fund First

Many hospital-employed physicians have access to both a 403b and a 457b plan. They are not the same. Here is how to decide which one to prioritize.

How Each Plan Works

A 403b is the nonprofit equivalent of a 401k. Contributions are made pre-tax, reducing your taxable income in the year you contribute. The money grows tax-deferred and is taxed as ordinary income when you withdraw it in retirement. The 2025 employee contribution limit is $23,500, with a $7,500 catch-up contribution allowed if you are 50 or older. Employers can also contribute to a 403b, and many hospital systems provide a match or a fixed employer contribution regardless of your own contribution amount.

A 457b is a deferred compensation plan available to employees of government entities and certain nonprofits. Like a 403b, contributions are pre-tax and reduce current taxable income. The 2025 limit is also $23,500, with a $7,500 catch-up. Critically, the 457b limit is separate from the 403b limit - meaning a physician with access to both plans can contribute $23,500 to each, for a combined $47,000 in pre-tax deferrals per year. That is a significant tax deferral opportunity that most high-income physicians should be using.

The Key Difference - How the Money Is Held

The most important distinction between a 403b and a 457b is not the contribution limit or the tax treatment - it is how the assets are legally held. In a 403b, your contributions are held in an individual account in your name, similar to a 401k. If your employer goes bankrupt, your 403b assets are protected because they are yours, held separately from the employer is general assets.

In a governmental 457b - offered by public hospitals and government employers - your funds are also held in a trust separate from the employer. But in a non-governmental 457b - offered by nonprofit hospitals and health systems - your contributions are technically an unsecured liability of the employer. The money is invested in your name, but it remains on the employer is balance sheet. If the hospital became insolvent, your 457b assets could potentially be claimed by creditors before you can access them.

The non-governmental 457b credit risk is real but often overstated for large, financially stable health systems. Evaluate the financial health of your employer before treating 457b funds as fully equivalent to 403b funds. For most physicians at major academic medical centers, the practical risk is low - but it is worth understanding before deferring large sums.

Which to Fund First

For most attendings, the right order is: first capture any employer match in the 403b, then maximize the 403b to the annual limit, then maximize the 457b if you have additional income to shelter. The 403b match is a guaranteed return that comes first regardless of any other consideration. Beyond that, the 403b is generally more secure than a non-governmental 457b and should be maximized first.

If you work for a government employer - a VA hospital, a public university medical center, or a state-run facility - the credit risk of the 457b is substantially reduced because governmental 457b funds are held in a separate trust. In that case, the order between the two plans matters less and the decision can be driven by investment options and plan fees instead.

The Tax Planning Angle

Combined, a 403b and 457b allow a physician earning $350,000 to defer $47,000 in pre-tax income annually. At a 37 percent marginal federal rate, that is over $17,000 in federal tax savings per year. Over a 15 to 20 year career, the compounded value of those deferrals is substantial - both in tax savings today and in tax-deferred growth over time.

Roth options are increasingly available in both 403b and 457b plans. If your plan offers a Roth 457b, the credit risk calculus does not change, but you gain the benefit of tax-free growth on those contributions. High-income physicians who expect to be in a lower bracket in retirement may prefer pre-tax deferrals. Those who expect tax rates to rise or who want more tax diversification in retirement may choose to split contributions between pre-tax and Roth within these plans.