A 457 plan is a retirement savings account for government and certain nonprofit employees

A 457 plan is a tax-deferred retirement savings account offered by state and local government employers, and by some nonprofit organizations. You contribute money from your paycheck before taxes are taken out, the money grows without being taxed each year, and you pay income tax only when you withdraw it in retirement. It works similarly to a 401(k), but with different rules about when you can take the money out and how much you can contribute.

The plan is named after section 457 of the Internal Revenue Code. If your employer offers one, you'll see it listed on your benefits paperwork or in your HR system. Not all government jobs include a 457 plan — some offer a 403(b) or a pension instead — so check what your employer actually provides.

Key Takeaways

  • A 457 plan lets you set aside pretax money from your paycheck for retirement, and the account grows without annual tax on the earnings.
  • You can contribute up to a set annual limit (which changes year to year) if your employer offers the plan.
  • Unlike a 401(k), you can withdraw money from a 457 plan without a 10% penalty if you separate from your employer, regardless of your age.
  • Money in a 457 plan belongs to your employer until you withdraw it, which is different from a 401(k) and creates different rules about what happens if the employer faces financial trouble.
  • You must begin taking withdrawals by a certain age, and the IRS taxes those withdrawals as ordinary income.

How contributions work and what you can set aside

When you enroll in your employer's 457 plan, you choose a percentage of your paycheck to contribute. That money comes out before federal income tax is calculated, which lowers your taxable income for the year. Your employer may also contribute to your account, though this varies by organization.

The IRS sets an annual contribution limit. For 2024, that limit is $23,500 (the amount changes most years). If you are age 50 or older, you can contribute an additional $7,500 in "catch-up" contributions, bringing your total to $31,000. These limits explore to your combined contributions across all 457 plans you may participate in — you cannot split the limit between two employers.

Your contributions reduce your current taxable income, which means you pay less in federal income tax this year. The trade-off is that you will owe income tax on the full amount (contributions plus earnings) when you withdraw it later.

The difference between a 457 plan and a 401(k)

Both plans let you save pretax money and defer taxes until withdrawal. The biggest difference is the separation-from-service rule. With a 401(k), if you withdraw money before age 59½, you typically owe a 10% early withdrawal penalty on top of income tax. With a 457 plan, you can withdraw money without that 10% penalty as soon as you leave your job, at any age.

A second difference involves who owns the money. In a 401(k), your contributions and earnings belong to you when ready — they are protected from your employer's creditors. In a 457 plan, the money technically belongs to your employer until you withdraw it. If your employer faces bankruptcy or financial crisis, your 457 account could be at risk, though this is rare for government employers.

A third difference is the required withdrawal age. With a 401(k), you must start taking withdrawals by age 73 (as of 2023). With a 457 plan, you must start by the later of age 72 or the year you retire from your job.

When and how you can withdraw money

You can withdraw money from a 457 plan in several situations. The most common is after you separate from your employer — you can then take the money out at any age without the 10% early withdrawal penalty. You can also withdraw money if you face an unforeseeable emergency, though your employer defines what qualifies and the rules are strict.

Some plans allow you to take a loan against your balance while you are still employed. The rules for loans vary by plan, so check your plan documents or ask your HR department whether this option is available to you.

Once you reach the required withdrawal age, you must begin taking money out each year in amounts calculated by the IRS. If you do not take the required amount, you face a 25% penalty on the shortfall (or 10% if you correct it within two years). All withdrawals are taxed as ordinary income in the year you receive them.

Investment options and how your money grows

Your 457 plan holds your money in investment options chosen by your employer. Common choices include mutual funds, target-date funds (which automatically shift from stocks to bonds as you near retirement), and stable value funds (which aim for steady, modest returns). Your employer selects which investments are available — you do not get to choose from all mutual funds on the market.

The money in your account grows tax-free each year. If your mutual fund earns 6% in a given year, you do not owe tax on that 6% gain. That tax deferral compounds over decades, which is why starting early makes a significant difference. You only pay tax when you withdraw the money.

You can usually change which investments your contributions go into, and you may be able to move money between existing investments. Check your plan's rules or ask HR about rebalancing options.

Vesting and what happens to employer contributions

If your employer contributes money to your 457 plan on your behalf, those contributions may be subject to a vesting schedule. Vesting means you do not own the employer's contribution when ready — you own it only after you have worked there for a certain period. For example, your employer might contribute 3% of your salary, but you own only 20% of it after one year, 40% after two years, and 100% after five years.

If you leave your job before you are fully vested, you forfeit the unvested portion of the employer contribution. Your own contributions are always 100% vested when ready — you own them from the moment they are deducted from your paycheck. Check your plan documents or ask HR about the vesting schedule for your employer's contributions.

Taxes and what you owe when you withdraw

When you withdraw money from a 457 plan, the full amount is taxed as ordinary income in the year you receive it. If you withdraw $10,000, that $10,000 is added to your other income for the year, and you pay federal income tax at your regular rate. You may also owe state income tax, depending on where you live and work.

If you withdraw money before age 59½ from a traditional 401(k), you owe a 10% penalty. A 457 plan does not have this penalty, but the IRS still taxes the withdrawal as income. Some people mistakenly think "no penalty" means "no tax" — it does not. You will owe income tax regardless of your age.

If you roll your 457 balance into another retirement account (such as a traditional IRA or a 401(k) at a new job), you can defer the taxes further. Rolling over is a way to move the money without triggering a tax bill when ready, though the rules for 457 rollovers are more limited than for 401(k)s. Talk to a tax professional or your plan administrator before rolling over a 457 balance.

Frequently Asked Questions

Can I have both a 457 plan and a 401(k)?

Yes. If you work two jobs — one for a government employer with a 457 and one for a private employer with a 401(k) — you can contribute to both. However, the annual contribution limits are separate for each plan type. You can put up to $23,500 in a 457 and up to $23,500 in a 401(k) in the same year, for a combined $47,000 (plus catch-up contributions if you are 50 or older).

What happens to my 457 if I leave my job?

Your money stays in the account. You can leave it there and let it grow, withdraw it without a 10% penalty, or roll it into another retirement account. You cannot make new contributions once you leave, but you can continue to invest the balance that remains. Check with your plan administrator about your options.

Can I withdraw money from my 457 before retirement?

You can withdraw for an unforeseeable emergency, though your employer defines what qualifies — typically job loss, serious illness, or major home damage. You can also take a loan if your plan offers it. Otherwise, you must wait until you leave your job or reach the required withdrawal age. Early withdrawal for non-emergency reasons results in income tax but not the 10% penalty that applies to 401(k)s.

Do I have to take money out of my 457 at a certain age?

Yes. You must begin withdrawals by the later of age 72 or the year you retire. The IRS calculates the minimum amount you must withdraw each year based on your age and account balance. If you do not take the required amount, you face a 25% penalty on the shortfall.

Is my 457 money safe if my employer goes bankrupt?

Government employers rarely face bankruptcy, but the money in a 457 plan is technically the employer's asset until you withdraw it, which is different from a 401(k). For state and local government employees, the risk is very low. For nonprofit employees, the risk is slightly higher. If you are concerned, talk to your HR department about your plan's protections.