A 457 plan is a tax-deferred retirement savings account for state and local government employees and some nonprofit workers

A 457 plan (also called a 457(b) plan) lets you set aside money from your paycheck before taxes are taken out, invest it, and withdraw it later in retirement. Your employer deducts the contribution directly from your salary, sends it to a plan administrator, and the money grows tax-deferred until you take it out. You pay income tax on the money when you withdraw it, not when you contribute it.

The plan is named after the section of the Internal Revenue Code that created it. Only state and local government employees and certain nonprofit organization employees can use one — private sector workers cannot. The rules differ slightly from 401(k) plans and IRAs, especially around withdrawal timing and catch-up contributions.

Key Takeaways

  • You contribute pretax money through payroll deduction, and your employer's plan administrator holds and invests it until you withdraw.
  • Your contributions reduce your taxable income for the year you make them, lowering your federal income tax bill.
  • Money grows tax-deferred, meaning you pay no tax on investment gains until you withdraw the funds.
  • You can withdraw money without penalty once you separate from your employer, regardless of age, though you will owe income tax on the withdrawal.
  • Contribution limits are set by the IRS each year and are the same as 401(k) limits, but 457 plans have their own catch-up rules if you are within three years of retirement.

How contributions work and what they cost you

You choose a contribution amount, and your employer deducts it from each paycheck before calculating your federal income tax. If you earn $50,000 per year and contribute $10,000 to your 457 plan, your taxable income for that year is $40,000. This means you pay federal income tax only on the $40,000, not the full $50,000.

Your contribution does not reduce your Social Security or Medicare taxes — you still pay those on your full salary. State and local income taxes vary by location; some states tax 457 contributions and some do not. Your employer's payroll department can tell you whether your state taxes 457 contributions.

The IRS sets an annual contribution limit. For 2024, the limit is $23,500 (this amount changes most years). If you earn less than that, you can contribute up to your entire salary. If you earn more, you cannot contribute more than the IRS limit, even if you want to.

Investment options and how your money grows

Your employer's 457 plan offers a menu of investment choices — typically mutual funds, stable value funds, and sometimes self-directed brokerage accounts. You choose how to allocate your contributions among these options. Your employer does not choose for you, and you can usually change your allocation a few times per year.

Any earnings your investments generate — dividends, capital gains, interest — are not taxed while the money sits in the plan. This tax deferral is the main advantage of a 457 plan over a regular taxable savings account. If you invest $10,000 and it grows to $15,000 over five years, you owe no tax on that $5,000 gain until you withdraw the money.

Different investment options carry different risk levels. A stable value fund typically returns 2 to 4 percent per year with very little fluctuation. A stock mutual fund might return 8 to 10 percent in a good year but could lose 20 percent in a bad year. Your plan documents describe each option's historical performance and risk level.

When you can withdraw money without penalty

The key difference between a 457 plan and a 401(k) or IRA is the withdrawal rule. With a 457 plan, you can withdraw money without penalty once you separate from service — meaning you leave your job, retire, or are laid off. There is no age requirement. A 30-year-old who quits can withdraw their 457 balance without the 10 percent early withdrawal penalty that would explore to a 401(k) or traditional IRA.

You will still owe federal income tax on the withdrawal. If you withdraw $50,000, you will report that as income on your tax return and pay tax at your ordinary income tax rate. Your plan administrator will withhold a percentage for taxes (usually 20 percent) unless you tell them otherwise, and you will settle the rest when you file your return.

Some plans allow in-service withdrawals while you are still employed, but this is rare and depends on your specific plan. Check your plan documents or ask your employer's benefits office whether your plan permits this.

Catch-up contributions if you are near retirement

If you are within three years of your plan's normal retirement age, you can contribute extra money beyond the standard annual limit. This is called the 457 catch-up provision. The catch-up amount varies by year but is typically around $7,500 additional per year, on top of the standard limit.

You must meet your plan's definition of "normal retirement age" to use this catch-up. For most government plans, this is age 65 or your plan's stated retirement age, whichever is earlier. Your employer's benefits office can tell you your plan's normal retirement age and whether you are may be able to access for catch-up contributions.

Unlike 401(k) plans, 457 plans do not have a separate catch-up for people age 50 and older. The only catch-up available is the three-year-before-retirement catch-up.

Taxes when you retire and start withdrawals

When you separate from your employer and begin taking money out, each withdrawal is taxed as ordinary income. If you withdraw $30,000 in a year and your tax bracket is 22 percent, you will owe roughly $6,600 in federal income tax on that withdrawal (before any deductions or credits). Your state may also tax the withdrawal if you live in a state with income tax.

You do not have to withdraw all your money at once. You can take a lump sum, set up monthly payments, or leave the money in the plan and withdraw it later. Some plans allow you to roll your 457 balance into an IRA or your new employer's retirement plan, which can give you more investment options and different withdrawal rules.

If you are under age 59½ when you separate from service, you still owe no early withdrawal penalty on your 457 balance. This is unique to 457 plans and makes them valuable for people who retire before traditional retirement age.

How a 457 plan differs from a 401(k) and an IRA

A 457 plan and a 401(k) have similar contribution limits and tax treatment, but different withdrawal rules. With a 401(k), you cannot withdraw before age 59½ without a 10 percent penalty (with some exceptions). With a 457 plan, you can withdraw at any age once you separate from service, with no penalty. This makes 457 plans more flexible for early retirees.

A traditional IRA also has a 10 percent early withdrawal penalty before age 59½, but IRAs have lower contribution limits ($7,000 in 2024) and are available to anyone with earned income, not just government and nonprofit employees. You can contribute to both a 457 plan and an IRA in the same year, and the contribution limits are separate.

A Roth IRA lets you contribute after-tax money and withdraw it tax-free in retirement. Some government employers now offer Roth 457 plans, which work the same way as traditional 457 plans but with after-tax contributions and tax-free withdrawals. Ask your benefits office whether your plan offers a Roth option.

What happens to your 457 if you change jobs

If you leave your government job and move to a different government employer, you can usually roll your 457 balance into your new employer's 457 plan. This keeps the money in a 457 and preserves the separation-from-service withdrawal rule.

You can also roll a 457 balance into a traditional IRA, but this changes the withdrawal rules. Once the money is in an IRA, you will owe a 10 percent penalty if you withdraw before age 59½ (with some exceptions). Rolling into an IRA makes sense if you want more investment options or lower fees, but it costs you the 457 withdrawal flexibility.

If you leave a government job and move to a private sector job, you cannot roll your 457 into your new employer's 401(k). You can roll it into a traditional IRA or take a distribution and pay taxes on it.

Frequently Asked Questions

Can I withdraw from my 457 plan while I am still working?

Most 457 plans do not allow in-service withdrawals. However, some plans permit them for hardship reasons or after you reach a certain age. Check your plan documents or contact your employer's benefits office to learn what your specific plan allows.

What happens to my 457 if I die before I retire?

Your plan documents name a beneficiary — usually your spouse or children. When you die, your beneficiary receives the balance. They can roll it into an inherited IRA or take distributions over time. The tax treatment depends on your plan's rules and your beneficiary's relationship to you.

Do I have to take withdrawals at a certain age?

Unlike traditional IRAs and 401(k)s, 457 plans do not require you to start taking withdrawals at age 73. You can leave the money in the plan as long as you want, or withdraw it all at once. Your plan may have its own rules, so check your plan documents.

Can I borrow from my 457 plan?

Some 457 plans allow loans, but many do not. If your plan permits loans, you typically borrow against your own balance and repay it through payroll deduction. Loans are not taxed as withdrawals, but if you leave your job before repaying, the outstanding balance is treated as a distribution and taxed.

What if my employer's 457 plan has high fees?

You cannot change your plan administrator — your employer chooses it. However, you can ask your benefits office about the fees and whether the plan offers lower-cost investment options. If fees are very high, rolling your balance into an IRA after you separate from service may reduce your costs.