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Commentary & Insights

Insight, Financial Planning

UC Voluntary Savings Plans

11 March 2024

By James Weimer

In Part 1, we provided a general overview of the UCRP defined benefit plan and the three primary voluntary savings accounts for UC employees. In Part II, we will help address the question many are probably wondering: “Which savings account should I choose?” 

Let’s look at the 403(b), 457(b), and DC plan to help answer this question.

403(b) and 457(b)

We’ll start with the 403(b) and 457(b) because they are very similar. They both:

  • Are available to every eligible UC employee.
  • Allow pre-tax and/or Roth contributions.
  • Have an annual employee contribution limit for 2024 of $23,500, or $30,500 if 50 or older.
  • Can be invested across a wide range of available investment options.

The are only a few major differences between the two: 

  • 403(b) plans allow for loans if you run into a financial hardship and need to access retirement savings. 457(b) plans do not.1
  • 457(b) plans do not allow current employees to make withdrawals unless they are age 59.5 or older. However, former employees are allowed to withdraw plan accumulations at any age, without penalty. 

If you like the flexibility and optionality of a loan, the 403(b) may be more attractive. If you do not anticipate being a UC employee for very long and you like the idea of being able to access the account at any time without penalty, the 457(b) will likely be more attractive. 

Or, if you have the budget, you can contribute to both plans up to the maximum contribution limit for each. 

Defined Contribution Plan 

The Defined Contribution Plan (DC Plan) is unique and unlike the 403(b) or 457(b) mainly because it:

  • Allows for “after-tax” contributions. 
    • Taxes are paid on the contributions up front. Earnings then grow tax-deferred until you make a distribution. 
  • Allows for distributions/rollovers of contributions at any time, without penalty. 
    • Distributions of investment earnings will be subject to income taxes and a possible 10% penalty if withdrawn before age 59.5.
  • Annual contributions can be as high as $66,000 (higher if 50 or older). 

The Defined Contribution plan is a great tool for:

  • Saving and investing additional income beyond the maximum contributions into the 403(b) and 457(b). 
  • Saving towards a short-term need. Contributions are liquid and accessible at any time. 
  • “Tax diversification” that offers flexibility in retirement to choose between pre-tax and after-tax accounts to withdraw from.
  • The potential to rollover after-tax contributions into a Roth IRA (more on this concept in a future article).

Putting It All Together

Utilizing these three voluntary savings plans, in any combination, offers a great opportunity to supplement retirement savings and increase tax diversification across retirement accounts through pre-tax, Roth, or after-tax contributions. How much you save into any depends on the amount of excess income available to save, your tax situation, and several other factors. Seeking professional guidance and planning to determine what best fits your needs is the best place to start.

  1. The 457(b) may allow for an emergency withdrawal without penalty in extreme situations.