What a 457 plan is and who can use one

A 457 plan is a retirement savings account offered by state and local government employers and some tax-exempt organizations. It works similarly to a 401(k) in that you contribute money before or after taxes (depending on the plan type), the money grows tax-deferred, and you pay taxes when you withdraw it in retirement. The key difference is that 457 plans are designed specifically for government and nonprofit workers, not private-sector employees.

Two types exist: the 457(b), which is the most common, and the 457(f), which is rare and typically offered only to highly compensated employees. This guide focuses on 457(b) plans, which is what most government workers encounter.

Your employer must offer the plan for you to participate. You cannot open a 457 plan on your own the way you can open an IRA. If your employer is a city, county, state agency, or a nonprofit hospital, university, or charity, check with your human resources or benefits office to see if a 457(b) is available to you.

Key Takeaways

  • A 457(b) plan is a retirement account for government and nonprofit employees that lets you contribute pre-tax or after-tax money that grows tax-deferred until withdrawal.
  • For 2024, you can contribute up to $23,500 per year to a 457(b), or $35,250 if you are age 50 or older and your plan allows catch-up contributions.
  • Unlike 401(k)s, 457 plans allow you to withdraw money without penalty once you separate from your employer, regardless of age, though taxes still explore.
  • You can have both a 457(b) and a 401(k) or 403(b) at the same time, but your combined contributions to both accounts cannot exceed the annual limit.
  • The money in a 457(b) belongs to your employer until you withdraw it, which means it is not protected from the employer's creditors in the same way other retirement accounts are.

How much you can contribute each year

The annual contribution limit for a 457(b) plan is set by the IRS and changes each year. For 2024, the limit is $23,500 per year. This is the total amount you can contribute from your paycheck, whether your plan is set up as pre-tax, after-tax, or a combination of both.

If you are age 50 or older and your plan allows it, you may be able to contribute an additional $7,750 per year as a catch-up contribution, bringing your total to $31,250. Some plans also allow a special catch-up in the final three years before you retire, which can double your contribution limit in those years, but not all plans offer this feature. Check with your benefits office to see what your specific plan allows.

If you also have a 401(k) or 403(b) through another employer, the contribution limits are separate. You can contribute the maximum to both accounts in the same year. However, if you have both a 457(b) and a 403(b) through the same employer, your combined contributions to both accounts cannot exceed the annual limit.

Pre-tax versus after-tax contributions

Most 457(b) plans allow you to choose whether to contribute pre-tax dollars, after-tax dollars, or a mix of both. Pre-tax contributions reduce your taxable income in the year you make them, which lowers your federal income tax bill. The money grows tax-deferred, meaning you do not pay taxes on the growth until you withdraw it. When you withdraw the money in retirement, you pay ordinary income tax on the entire amount.

After-tax contributions (also called Roth contributions) are made with money you have already paid income tax on. The money grows tax-free, and when you withdraw it in retirement, you do not pay income tax on the growth or the original contributions. You only pay taxes on any earnings that came from investment growth. After-tax contributions are useful if you expect to be in a higher tax bracket in retirement or if you want tax-free growth.

Some plans offer both options, allowing you to split your contribution between pre-tax and after-tax. Your choice depends on your current tax situation and what you expect in retirement. Your plan documents and benefits office can tell you which options are available to you.

When you can withdraw money without penalty

The biggest advantage of a 457(b) plan compared to a 401(k) or 403(b) is the withdrawal rule. You can withdraw money from your 457(b) without a 10 percent early withdrawal penalty once you separate from service with your employer, regardless of your age. This means if you leave your job at age 45, you can start withdrawing from your 457(b) without penalty.

However, separation from service has a specific meaning. It generally means you have terminated employment with the government or nonprofit employer that sponsors the plan. If you are rehired by the same employer within a short period, the IRS may consider you still in service. Check your plan documents or ask your benefits office what counts as separation for your specific plan.

You must still pay ordinary income tax on the money you withdraw, whether it came from pre-tax or after-tax contributions. The penalty-free withdrawal rule only applies to the 10 percent early withdrawal penalty; it does not eliminate the income tax you owe.

Required withdrawals and the timeline for taking money out

You must begin taking withdrawals from your 457(b) by April 1 of the year after you reach age 73 (as of 2023; this age has increased from 72 due to the find Act 2.0). These are called required minimum distributions, or RMDs. The IRS calculates the amount you must withdraw each year based on your account balance and life expectancy.

If you separate from service before age 73, you do not have to take RMDs until you reach that age, even if you have already started withdrawing money. This is different from a 401(k), where RMDs begin at age 73 regardless of whether you are still working.

You can withdraw money before age 73 if you choose to, and you will not face a penalty as long as you have separated from service. However, you will owe income tax on the withdrawal. Some plans also allow loans against your 457(b) balance while you are still employed, though not all do.

How 457 plans differ from 401(k)s and 403(b)s

A 457(b) plan and a 401(k) or 403(b) are similar in structure but have important differences. The most significant is the withdrawal rule: with a 457(b), you can withdraw penalty-free after separation from service at any age. With a 401(k) or 403(b), you generally cannot withdraw before age 59½ without a 10 percent penalty, even if you leave your job.

Another difference is creditor protection. Money in a 401(k) or 403(b) is protected from your employer's creditors under federal law. Money in a 457(b) is not. If your government or nonprofit employer faces financial trouble or bankruptcy, the 457(b) funds are technically still the employer's property until you withdraw them, which creates a small risk that creditors could claim them. This is rare but possible.

Contribution limits are separate between a 457(b) and a 401(k) or 403(b), meaning you can contribute the maximum to both in the same year if you have access to both. However, if your employer offers both a 457(b) and a 403(b), your combined contributions to both cannot exceed the annual limit.

What happens to your 457(b) when you change jobs

When you leave your government or nonprofit job, your 457(b) stays in the plan unless you choose to move it. You have several options: leave the money in the plan, roll it over to an IRA, roll it over to a new employer's 457(b) plan if you move to another government or nonprofit employer, or withdraw it.

If you roll the money to an IRA, you can invest it however you choose and avoid RMDs until age 73. If you roll it to a new employer's 457(b), the money continues to grow tax-deferred under the same rules. If you withdraw it, you will owe income tax on the entire amount (or just the earnings if it was an after-tax contribution).

Some plans charge fees to keep your account open after you leave, so check with your former employer's benefits office about what happens to your account and whether you should move the money.

Frequently Asked Questions

Can I have a 457(b) and a 401(k) at the same time?

Yes. If you work for a government or nonprofit employer with a 457(b) and also have a side job or second employer with a 401(k), you can contribute to both. Your contribution limits are separate, so you can contribute the maximum to each account in the same year. However, if both accounts are through the same employer, your combined contributions cannot exceed the annual limit.

What is the difference between a 457(b) and a Roth 457(b)?

A traditional 457(b) uses pre-tax contributions that reduce your current taxable income. A Roth 457(b) uses after-tax contributions, so you do not get a tax deduction now, but the money grows tax-free and you do not pay tax on withdrawals. Not all plans offer a Roth option, so check with your benefits office.

Do I have to take money out of my 457(b) when I retire?

You must take required minimum distributions starting at age 73, but you can withdraw money earlier if you separate from service at any age without a penalty. You are not required to withdraw before age 73 unless your plan requires it or you choose to.

What happens to my 457(b) if I die before I retire?

Your beneficiary, usually a spouse or child you named when you opened the account, will inherit the money. They can roll it to an inherited IRA or withdraw it, depending on the plan and their relationship to you. Your plan documents explain what happens to your account after death.

Can I borrow money from my 457(b)?

Some 457(b) plans allow loans, but not all. If your plan allows it, you can typically borrow up to 50 percent of your account balance, and you must repay it within a set time frame, usually five years. Check your plan documents or ask your benefits office whether loans are available.