A 457 plan and an IRA are two different retirement accounts with different rules

No, a 457 plan is not an IRA. They are separate retirement savings accounts with different owners, different contribution limits, different withdrawal rules, and different tax treatment. A 457 plan is offered by your employer — usually a state or local government agency or certain nonprofits — and the money stays in your employer's plan. An IRA is an individual account you open on your own at a bank, brokerage, or credit union, and you control it yourself.

The confusion is understandable because both are retirement accounts and both offer tax advantages. But the mechanics are different enough that you need to understand which one you have before you make decisions about saving or withdrawing money.

Key Takeaways

  • A 457 plan is sponsored and managed by your employer, while an IRA is an individual account you open yourself at a financial institution.
  • 457 plans allow much higher annual contributions than IRAs — the 2024 limit for a 457 is $23,500, compared to $7,000 for an IRA.
  • You can withdraw money from a 457 plan without penalty once you leave your job, but IRA withdrawals before age 59½ usually trigger a 10 percent penalty plus taxes.
  • You can have both a 457 plan and an IRA at the same time, and the contribution limits are separate from each other.
  • A 457 plan is only available if your employer offers one; an IRA is available to anyone with earned income.

Who owns and controls each account

Your employer owns and administers the 457 plan. Your employer chooses the plan provider, decides which investment options are available, and handles payroll deductions. You make contributions through your paycheck, and your employer sends that money to the plan. The plan has a document that spells out all the rules — when you can withdraw, what happens if you leave the job, how the money is invested.

You own and control an IRA completely. You open it yourself at a financial institution of your choice. You decide how much to contribute each year (up to the limit), you choose the investments, and you can move the account to a different institution whenever you want. No employer is involved unless you work for a company that offers an IRA match, which is separate from a 457 plan.

How much you can contribute each year

A 457 plan allows you to contribute up to $23,500 per year (for 2024). This is a much higher limit than an IRA. If you are age 50 or older, you can contribute an additional $7,500 as a catch-up contribution, bringing your total to $31,000.

An IRA has a contribution limit of $7,000 per year (for 2024). If you are age 50 or older, you can add an extra $1,000 catch-up contribution, for a total of $8,000. This limit applies whether you have a traditional IRA or a Roth IRA.

The important detail: these limits are separate. If you have both a 457 plan and an IRA, you can contribute the full amount to each one in the same year. You are not choosing between them — you can max out both if your income allows.

When you can withdraw money without penalty

A 457 plan has a major advantage for early withdrawals. Once you leave your job — whether you retire, resign, or are laid off — you can withdraw money from your 457 plan without the 10 percent early withdrawal penalty that normally applies to retirement accounts. You will still owe income tax on the withdrawal, but there is no additional penalty. This is true even if you are in your 40s or early 50s.

An IRA has stricter rules. If you withdraw money before age 59½, you owe income tax on the withdrawal plus a 10 percent penalty on the amount withdrawn. There are some exceptions — you can withdraw for a first-time home purchase, medical expenses, or education costs — but the general rule is that early withdrawals cost you.

This difference makes a 457 plan valuable if you think you might retire or change jobs before age 59½. You can access your money without penalty. With an IRA, you would be stuck paying the penalty unless one of the exceptions applies.

Tax treatment of contributions and withdrawals

Most 457 plans are traditional 457 plans, which means your contributions come out of your paycheck before taxes are withheld. You do not pay income tax on the money when you contribute it. When you withdraw the money in retirement, you pay income tax on the full amount withdrawn.

Some employers also offer a Roth 457 option. With a Roth 457, you contribute after-tax dollars — you pay income tax on the money now. When you withdraw in retirement, the money comes out tax-free. Roth 457 plans are less common than traditional 457 plans.

IRAs work the same way. A traditional IRA gives you a tax deduction for your contributions now, and you pay tax on withdrawals later. A Roth IRA takes after-tax contributions now, and withdrawals are tax-free later. The tax treatment is identical between a 457 and an IRA of the same type — the difference is in the contribution limits and withdrawal rules.

Required withdrawals at a certain age

Both accounts require you to start taking withdrawals at a certain age, but the age is different. With a 457 plan, you must begin withdrawals by April 1 of the year after you turn 73 (as of 2023; this age has been rising gradually). With an IRA, the same rule applies — withdrawals must begin by April 1 of the year after you turn 73.

However, there is one exception: if you are still working and contributing to a 457 plan, you may be able to delay withdrawals until you actually retire. This is called the "still-working exception." IRAs do not have this exception — if you turn 73, you must start withdrawals even if you are still working, unless you have a Roth IRA (Roth IRAs have no required withdrawal age during your lifetime).

Whether you can have both at the same time

Yes, you can have a 457 plan and an IRA at the same time. Many people do. If your employer offers a 457 plan, you can contribute to it through payroll deductions. At the same time, you can open an IRA on your own and contribute to it separately. The contribution limits do not overlap — you can contribute the full $23,500 to your 457 and the full $7,000 to your IRA in the same year.

This is useful if you want to save more than the IRA limit allows, or if you want the flexibility of an IRA in addition to your employer plan. Some people use the 457 plan as their main retirement savings vehicle and the IRA as a secondary account for additional savings or for rolling over money from a previous job.

Frequently Asked Questions

Can I roll a 457 plan into an IRA when I leave my job?

Yes, you can roll a 457 plan into a traditional IRA, but you must do it correctly to avoid taxes and penalties. The money must go directly from the 457 plan to the IRA — this is called a direct rollover. If you take the money yourself and then deposit it, you may owe taxes and penalties. Contact your 457 plan administrator and your IRA provider to arrange the direct rollover.

If I have a 457 plan, do I still need an IRA?

Not necessarily. A 457 plan alone can be a solid retirement savings tool, especially because the contribution limit is high and you can withdraw without penalty once you leave your job. An IRA makes sense if you want additional savings beyond the 457 limit, or if you want more control over your investments and account management.

What happens to my 457 plan if I get fired or laid off?

You keep the money in your 457 plan. Your employer cannot take it back. You can leave it in the plan, withdraw it, or roll it into an IRA. If you withdraw it, you owe income tax but no early withdrawal penalty, even if you are younger than 59½. Check your plan documents or contact your plan administrator for your specific options.

Can I contribute to both a 457 plan and a 401(k) in the same year?

Yes, but the contribution limits are separate. A 457 plan and a 401(k) are both employer plans, but they have independent contribution limits. You can contribute up to $23,500 to each one in the same year if your employers offer both. This is different from an IRA, which has a combined limit if you have both a traditional and Roth IRA.