A 457 plan lets you set aside money from your paycheck before taxes, with the amount you can contribute and when you can withdraw it determined by your employer and the plan rules

A 457 plan is a retirement savings account offered by state and local government employers, and by some nonprofits. Money comes directly from your paycheck, reduces your taxable income for the year you contribute, and grows tax-free until you withdraw it. The main difference from a 401(k) is that 457 plans have their own withdrawal rules — you can generally take money out without penalty once you leave your job, even before age 59½, but you cannot take loans from the account the way you can with a 401(k).

Your employer sets up the plan and chooses which investment options you can pick from. You decide how much to contribute each pay period (within IRS limits), and your employer deducts that amount before calculating your taxes. The money sits in the account under your name, and you control where it is invested among the choices your plan offers.

Key Takeaways

  • You contribute money before taxes, which lowers your taxable income in the year you contribute, but you pay income tax on withdrawals later.
  • The IRS sets an annual contribution limit that changes each year, and your employer may set a lower limit or offer a catch-up option if you are within three years of retirement.
  • You can withdraw money without the 10 percent early withdrawal penalty once you separate from your employer, regardless of your age.
  • If you change jobs, you can roll your 457 balance into an IRA or your new employer's retirement plan, or leave it where it is if your old employer allows it.
  • Your 457 balance is not protected from your creditors the way IRAs are, so it could be seized in a lawsuit or bankruptcy.

How much you can contribute each year

The IRS sets a yearly limit on how much you can put into a 457 plan. For 2024, that limit is $23,500, but it changes annually — the IRS adjusts it for inflation. Your employer may allow you to contribute less than the IRS limit, but not more. Check your plan documents or ask your payroll office what your specific plan allows.

If you are within three years of your plan's normal retirement age (usually 65, but your plan defines it), you may be able to contribute an extra amount called a catch-up contribution. This can double your limit in those final years. Some plans also offer a special catch-up for government employees who did not contribute the maximum in earlier years — you can make up the difference, but only if your plan includes this option and only for a limited time.

Your contributions come out of your gross pay, meaning before federal income tax is withheld. This lowers your taxable income for the year. If you earn $60,000 and contribute $10,000 to your 457, you report only $50,000 as taxable income on your federal return.

When you can withdraw money without penalty

The defining feature of a 457 plan is that you can withdraw your money without a 10 percent early withdrawal penalty once you leave your job, even if you are 35 years old. This is different from a 401(k) or IRA, where early withdrawal usually triggers a penalty. With a 457, the penalty straightforward does not explore after separation from service.

You still owe income tax on the money you withdraw — that has not changed. But you do not owe the extra 10 percent penalty. This makes 457 plans useful if you think you might retire or change jobs before age 59½.

Some plans allow you to withdraw money while you are still employed, but only in cases of financial hardship or, in some cases, if you reach age 59½. The rules vary by plan, so check with your employer about what your specific plan permits.

What happens to your 457 when you leave your job

When you separate from your employer, you have several options for your 457 balance. You can leave the money in the plan if your employer allows it — the account keeps growing tax-free, and you can withdraw it whenever you need it. You can also roll it into an IRA (either traditional or Roth, depending on your situation), which gives you more investment choices and potentially lower fees. A third option is to roll it into your new employer's 401(k) or 403(b) plan, if that plan accepts rollovers.

If you do not do anything, your employer may eventually force you to move the money. Plans often require that balances over a certain amount (usually $5,000) be rolled out if you do not choose an option within a set timeframe. If you do not act and your balance is under that threshold, the plan may cash you out and send you a check — you would then owe income tax on the full amount.

Rolling your 457 into an IRA is often the simplest path because IRAs offer hundreds of investment options and typically have lower fees than employer plans. Ask your 457 plan administrator for the rollover paperwork, and they can send the money directly to your IRA provider so you avoid taxes and penalties.

Tax treatment of contributions and withdrawals

Money you contribute to a 457 plan is pre-tax, which means it reduces your taxable income in the year you contribute. If you contribute $15,000, your employer reports $15,000 less in wages to the IRS. This lowers your federal income tax bill for that year.

When you withdraw the money in retirement, you pay ordinary income tax on it at whatever tax rate applies in the year you withdraw. If you withdraw $30,000 in a year when you have no other income, you pay tax only on that $30,000. If you withdraw $30,000 and also have a pension and Social Security, all three are added together to calculate your tax.

Your employer should send you a 1099-R form each year you take a withdrawal, showing how much you withdrew and how much is taxable. You report this on your tax return. Unlike a Roth IRA, there is no way to withdraw your contributions tax-free — all withdrawals are taxed as ordinary income.

How investment choices work inside a 457

Your employer chooses which investments you can pick from — typically mutual funds, target-date funds, stable value funds, and sometimes individual stocks or bonds. You do not have to pick just one; you can split your contributions among several options. You can also change how your money is invested as often as your plan allows, usually quarterly or annually.

The investment options in a 457 are the same as in most 401(k) plans: low-cost index funds, actively managed funds, bond funds, and money market funds. Your plan may also offer a self-directed brokerage option that lets you buy individual stocks or other securities, though this is less common. The fees charged by these investments vary — some funds charge 0.05 percent annually, while others charge 1 percent or more.

Your employer is required to offer at least three investment options with materially different risk and return characteristics. This means you should have at least one conservative choice, one moderate choice, and one aggressive choice. If your plan does not offer this, contact your plan administrator.

Creditor protection and other limits

Unlike an IRA, which has strong creditor protection under federal law, a 457 plan balance can be seized by creditors in a lawsuit or bankruptcy. This is an important distinction if you are concerned about liability. Your state may offer some protection, but it is not may provide. Check your state's laws or speak with an attorney if this is a concern for you.

Your 457 balance also counts as an asset if you explore for means-tested benefits like Medicaid or Supplemental Security Income. Having a large 457 balance could disqualify you from these programs. This is different from Social Security, which does not count retirement savings as income.

If you die before withdrawing all your money, your beneficiary inherits the balance. They can roll it into an IRA in their own name or take distributions over their lifetime, depending on the plan rules and their relationship to you. Your plan documents should name a beneficiary — if you have not done this, the money goes to your estate.

Frequently Asked Questions

Can I withdraw money from my 457 before I leave my job?

Most 457 plans do not allow withdrawals while you are employed, except in cases of financial hardship as defined by the plan. Some plans allow withdrawals at age 59½. Your plan documents or payroll office can tell you what your specific plan permits. Hardship withdrawals are taxed as ordinary income but do not trigger the 10 percent early withdrawal penalty.

What is the difference between a 457 and a 401(k)?

The main difference is withdrawal timing: a 457 lets you withdraw without penalty once you leave your job, while a 401(k) charges a 10 percent penalty for withdrawals before age 59½. A 401(k) also allows loans, while a 457 does not. Both reduce your taxable income when you contribute, and both are taxed as ordinary income when you withdraw.

Can I roll my 457 into a Roth IRA?

You can roll a 457 into a traditional IRA without tax consequences, but rolling into a Roth IRA triggers income tax on the amount you roll. You would owe tax in the year you do the rollover. This can be useful if you expect to be in a lower tax bracket that year, but it is a significant tax bill, so consult a tax professional first.

What happens if I do not withdraw my 457 by a certain age?

Unlike a traditional IRA, a 457 plan does not require you to start withdrawals at any specific age. You can leave the money in the plan indefinitely after you retire, as long as your employer allows it. However, once you reach age 73, you must begin taking required minimum distributions from IRAs — if you rolled your 457 into an IRA, that rule applies to the IRA portion.

Is my 457 protected if I declare bankruptcy?

A 457 plan is not protected from creditors the way an IRA is under federal law. In bankruptcy, your 457 balance could be included in assets available to creditors. Some states offer limited protection, but this varies. Speak with a bankruptcy attorney in your state to understand your specific situation.