401(k) vs 457(b) for Hospital-Employed Doctors

Choosing a 401(k) vs 457(b) for hospital-employed doctors starts with one fact. The two plans do not share one employee deferral cap. For 2026, the IRS elective deferral limit is $24,500 for a 401(k) and a separate $24,500 for a governmental 457(b). A doctor who is allowed into both can defer up to $49,000 before any age-50 catch-up. The right choice depends on who sponsors the 457(b), whether the 401(k) match is real money, and when you expect to need the cash.

Ask Clear Peak to model your 401(k) and 457(b) deferrals

How a 401(k) vs 457(b) for hospital-employed doctors is set up

Start with the plan document, not the brochure. A 401(k) is a qualified plan under IRC Section 401(a). Private hospitals, physician groups, and many for-profit systems use it. A 457(b) is an eligible deferred compensation plan, and the IRS splits it into two kinds.

A governmental 457(b) is sponsored by a state or local government, or by an agency or instrumentality of one. County hospitals, public university medical centers, and some municipal health systems fall here. Employees and, if the plan allows, independent contractors who perform services for that employer may participate. The plan may offer a Roth deferral.

A tax-exempt 457(b) is sponsored by a nonprofit that is not a government. Participation is limited to a select group of management or highly compensated employees. There is no Roth option inside this kind of 457(b). Assets generally remain available to the employer’s creditors until paid, which is a different risk from a qualified 401(k) trust.

Many nonprofit hospitals offer a 403(b) rather than a 401(k). A 403(b) shares the same elective deferral ceiling as a 401(k). It does not get the separate ceiling a 457(b) gets. If your packet lists a 403(b) and a 457(b), the stacking math below still applies, with the 403(b) in the 401(k) column. The broader menu of physician plans, including cash balance and defined benefit designs, sits on a different page: retirement plans for physicians beyond a standard 401(k).

2026 deferral limits, and why they stack

The IRS aggregates elective deferrals across 401(k), 403(b), SIMPLE, and SARSEP plans. A 457(b) is outside that group. The IRS states that a 457(b) has its own limit, and that limit counts both employee and employer contributions to the 457(b).

For 2026, IRS Notice 2025-67 sets these dollar amounts:

• Elective deferrals to a 401(k), 403(b), or governmental 457(b): $24,500, up from $23,500 in 2025.
• Age-50 catch-up for those plans, when the plan allows it: $8,000, up from $7,500. That raises one plan’s employee deferral to $32,500.
• Higher catch-up for people who turn 60, 61, 62, or 63 in 2026: $11,250 instead of $8,000, when the plan allows it.
• Defined contribution annual additions under Section 415(c), which cap a 401(k) including employer money: $72,000 before catch-up.

A hospitalist under 50 who defers $24,500 to the 401(k) and $24,500 to a governmental 457(b) has used two legal limits, not one. The 401(k) can still receive employer contributions on top of the $24,500, up to the $72,000 annual-additions cap. The 457(b) cannot. Employer money into the 457(b) eats the same $24,500.

Age-50 catch-up is available in a governmental 457(b). It is not available in a tax-exempt 457(b). A 457(b) may allow a special catch-up in the three years before the plan’s normal retirement age. The cap is the lesser of twice the basic limit or the basic limit plus unused deferrals from prior years. You cannot use that special catch-up and the age-50 catch-up in the same year. Take whichever the plan allows that is larger.

One more coordination rule matters if you change jobs mid-year. Deferrals to every 401(k) and 403(b) you join in the same calendar year still share one $24,500 cap. Each unrelated employer’s 457(b) has its own cap, but you cannot defer more than 100 percent of includible compensation from that employer.

Feature	401(k)	Governmental 457(b)	Tax-exempt 457(b)
Typical hospital sponsor	Private or for-profit hospital.	State, county, or public hospital.	Nonprofit hospital, select group only.
2026 employee deferral	$24,500.	$24,500, separate from the 401(k).	$24,500, separate from the 401(k).
Employer money	Extra, inside the $72,000 cap.	Counts toward the $24,500.	Counts toward the $24,500.
Age-50 catch-up in 2026	$8,000 if the plan allows.	$8,000 if the plan allows.	Not permitted.
Roth deferrals	If the plan allows.	If the plan allows.	Not permitted.
Creditor exposure	Held in a qualified trust.	Held for participants.	Generally subject to employer creditors.

Match, vesting, and where the first dollar goes

Free employer money beats a second deferral bucket. Read the 401(k) match formula before you max the 457(b). A common formula deposits 50 percent of the first 6 percent of pay. On $400,000 of W-2 wages that match is $12,000, but only if you defer at least $24,000 to the 401(k). Stopping the 401(k) at a lower percent to feed the 457(b) can leave that match on the table.

Vesting is the second check. Your own deferrals are always yours. Employer dollars may vest over three to six years, or immediately. A physician who expects to leave after a two-year contract should not count an unvested match as savings. Governmental 457(b) employer contributions are less common, and any that exist also consume the 457(b) limit, so a large employer deposit can crowd out your own deferral.

A practical order for a hospital-employed doctor with both plans:

1. Defer enough in the 401(k) to collect the full match.
2. Fill the 401(k) employee deferral if the investments and fees are acceptable.
3. Fill the governmental 457(b) next, because it is a second cap and is held for you.
4. Use a tax-exempt 457(b) only after you accept the creditor risk and the tighter distribution rules.
5. Put extra cash in a backdoor Roth IRA or a taxable account. Those are outside both plan caps.

Investment menus differ. Hospital 401(k) plans often use a recordkeeper’s target-date series and a short list of index funds. A governmental 457(b) can be similar, or it can be a narrower stable-value menu. Compare expense ratios, not the logo. A 0.60 percent gap on $200,000 is $1,200 a year, which can erase a small match advantage.

Distributions, rollovers, and the 10 percent tax

Access is where the plans diverge. A 401(k) distribution before age 59 1/2 is generally subject to a 10 percent additional tax on the taxable amount, unless an exception applies. One exception used by physicians who retire early is separation from service in or after the year they turn 55. That exception does not apply to an IRA, so rolling the 401(k) to an IRA before taking those payments can cost the exception.

The IRS treats a distribution from an eligible governmental 457(b) differently. Topic No. 558 states that this plan is not a qualified retirement plan, and a distribution from it is not subject to the 10 percent additional tax. The exception has a bite. If the 457(b) holds money rolled in from a 401(k) or 403(b), the portion that came from that rollover can still draw the 10 percent tax. Keep rollover money in a separate account if the plan allows it, so the records stay clean.

Rollovers are not equal either. A governmental 457(b) can generally accept and send rollovers to an IRA, a 401(k), a 403(b), or another governmental 457(b). A tax-exempt 457(b) usually cannot roll to an IRA or a 401(k). Payouts follow the plan’s schedule, often when you leave that employer. That is a reason to read the distribution section before you defer six figures into a nonprofit plan. Unforeseeable-emergency withdrawals, when the plan allows them, are narrower than a 401(k) hardship withdrawal.

Loans are another split. Many 401(k) plans allow a loan of up to $50,000 or half the vested balance. A tax-exempt 457(b) generally cannot offer loans. A governmental 457(b) can only if the document says so. Do not assume the hospital’s 457(b) works like its 401(k) loan page.

Required minimum distributions now begin at age 73 under the current rules. Both plan types are subject to them unless you are still working and the plan’s still-working exception applies. Taking a lump sum in one tax year can push a California resident into the top brackets. Spreading payments is often the better plan. If you later convert a 401(k) balance to a Roth IRA, that is a separate decision covered in converting a 401(k) to a Roth IRA in California.

Governmental and nonprofit 457(b) plans are not the same product

Hospital letterhead does not tell you which 457(b) you have. A county medical center and a private nonprofit hospital can both say “457(b)” and mean different rules. The IRS comparison of the two plans is the checklist to use with human resources.

• Who may join. Governmental plans can cover employees broadly. Tax-exempt plans are limited to a select group of management or highly compensated employees. A staff hospitalist at a nonprofit may not be eligible even when executives are.
• Roth. Only the governmental plan may accept designated Roth deferrals. A nonprofit 457(b) is pre-tax only.
• Age-50 catch-up. Governmental yes, tax-exempt no. The special three-year catch-up can exist in either, and it replaces the age-50 catch-up in any year you use it.
• Assets. Governmental plans hold assets for participants. Tax-exempt plan assets generally stay subject to the employer’s general creditors. If the nonprofit fails, you are a creditor, not a trust beneficiary.
• Election timing. Both plans require the salary-reduction election before the first day of the month in which the pay is earned. A 401(k) election can often start with the next payroll. Missing the 457(b) cutoff by a day waits a month.

That creditor point is why some physicians cap a tax-exempt 457(b) even when the dollar limit is attractive. The same concern is why nonqualified deferred compensation, including 457(f) arrangements, belongs in its own analysis. See nonqualified deferred compensation for California physicians before you treat a 457(f) promise as a 457(b).

California tax on both plans

California residents pay state income tax on taxable distributions from these plans. The Franchise Tax Board’s Schedule G-1 instructions state that California does not tax qualified retirement distributions received by nonresidents after December 31, 1995. A resident does not get that exclusion. Pre-tax deferrals lower federal taxable wages, and California starts from federal adjusted gross income, so the deferral also lowers California tax in the year you contribute. There is no California subtraction that puts the money back.

The state rate is what makes the deferral valuable. California’s top marginal rate on ordinary income is 12.3 percent, before the 1 percent Mental Health Services Tax on taxable income over $1 million. A physician already in the top bracket who defers $24,500 saves that state tax now and pays it when the dollars come out. Leaving California before distributions start can lower state tax on later payments. That drop applies only if you are a nonresident when you receive qualified-plan distributions and the income is not California-source wages. Move timing should be documented. The Franchise Tax Board looks at residency facts, not a change of mailing address. The rules for residents and nonresidents are laid out in California retirement income tax.

Roth deferrals inside a 401(k) or a governmental 457(b) do not reduce California wages. Qualified Roth distributions are tax-free at the federal level and California conforms to that treatment for qualified Roth amounts. A doctor who will stay in California and already holds a large pre-tax balance can split new deferrals. Putting some dollars in Roth keeps later required distributions from stacking on pension or Social Security income. The traditional-versus-Roth choice inside one 401(k) is covered separately in traditional 401(k) versus Roth 401(k) for high earners.

Two California-specific traps show up on hospital payrolls:

• State disability and other California payroll items are computed on wages after certain pre-tax deductions. Confirm with payroll whether 457(b) deferrals reduce the wage base the same way 401(k) deferrals do. They often do for income tax and do not for Social Security, because 457(b) deferrals are generally subject to FICA when deferred.
• A large deferral can shrink federal and California withholding enough to create an underpayment penalty if you also have moonlighting, a spouse’s income, or investment gains. Estimated-tax planning still applies. Ways to lower taxable income beyond plan deferrals are in how California professionals reduce taxable income.

W-2 reporting is the practical checkpoint. Pre-tax 401(k) deferrals appear in Box 12 with code D, and they are excluded from Box 1. Governmental 457(b) deferrals use code G. If both codes are missing, the deferral may not have happened, and you may have paid tax on money you thought you sheltered. Compare Boxes 1, 3, and 5. Social Security wages in Box 3 often stay higher than Box 1 because retirement deferrals do not reduce FICA wages.

A decision you can run on one contract

Use the plan names in the contract, then run this sequence.

1. Identify the sponsor. Public hospital means test the governmental 457(b) rules. Private nonprofit means test the select-group and creditor rules. For-profit means you may only have a 401(k).
2. Write down the 2026 caps you can actually use: $24,500 plus match room in the 401(k), and a separate $24,500 in the 457(b) that includes any employer 457(b) deposit.
3. Add catch-up only if you qualify and the document allows it. Do not add the age-50 amount on a tax-exempt 457(b).
4. Take the full 401(k) match before you add 457(b) dollars.
5. Check distribution and rollover terms if you might leave before 59 1/2 or change states.
6. Project California tax in the deferral year and in a sample distribution year. A deferral that only helps federal tax can still be right, but you should see the state number.

Numbers change. The $24,500 and $8,000 figures are 2026 limits from IRS Notice 2025-67. Your plan can set a lower cap, a later entry date, or no catch-up at all. The summary plan description controls.

Have Clear Peak review both plan documents before you enroll

Frequently asked questions

Can a hospital-employed doctor contribute to a 401(k) and a 457(b) in the same year?

Yes, if you are eligible for both and each plan accepts deferrals. The IRS gives the 457(b) its own limit. It does not count against the 401(k) elective deferral cap. In 2026 that is $24,500 in each plan before catch-up.

Does a 457(b) employer contribution reduce what I can defer?

Yes. The 457(b) limit covers employee and employer contributions together. A $5,000 employer deposit into the 457(b) leaves $19,500 of room for your own 2026 deferral. Employer deposits into a 401(k) do not work that way. They sit under the separate $72,000 annual-additions limit.

Is a 457(b) distribution subject to the 10 percent early withdrawal tax?

A distribution from an eligible governmental 457(b) is not subject to that 10 percent additional tax. Money that was rolled into the 457(b) from a 401(k), 403(b), or IRA can still be subject to it. A 401(k) distribution before 59 1/2 generally is subject to the 10 percent tax unless an exception, such as separation after age 55, applies.

Does California tax 401(k) and 457(b) withdrawals?

California residents are taxed on the taxable amount of these distributions. Nonresidents are not taxed by California on qualified retirement distributions received after 1995. Pre-tax contributions reduce California income in the year deferred because the state starts from federal adjusted gross income.

What is the difference between a governmental and a tax-exempt 457(b)?

A governmental 457(b) can cover employees broadly, may allow Roth deferrals and an age-50 catch-up, and holds assets for participants. A tax-exempt 457(b) is limited to a select group, cannot offer Roth deferrals or the age-50 catch-up, and generally leaves assets subject to the employer’s creditors.

Talk with Clear Peak about your hospital retirement elections