A 457(b) plan lets you set aside part of your paycheck before taxes to save for retirement

A 457(b) deferred compensation plan is a retirement savings account offered by state and local government employers, and some nonprofit organizations. You contribute money directly from your paycheck, and that money grows tax-free until you withdraw it in retirement. The key word is "deferred" — you're deferring taxes on that income until later, when you'll likely be in a lower tax bracket.

Unlike a 401(k), which is common in the private sector, a 457(b) is designed specifically for public employees. Your employer sets up the plan and chooses which investment options you can pick from. You decide how much to contribute each year (up to an annual limit set by the IRS), and your employer does not have to match your contributions, though some do.

The money sits in an investment account — usually a mix of mutual funds or stable value funds — and compounds over time. When you leave your job or reach retirement age, you can start taking withdrawals. You'll owe income tax on the money then, but not before.

Key Takeaways

  • A 457(b) is a tax-deferred retirement account for government and nonprofit employees, where contributions come directly from your paycheck before income tax is calculated.
  • Your contributions and investment earnings grow tax-free until you withdraw them, at which point you pay income tax on the full amount.
  • The IRS sets an annual contribution limit that changes each year, and you can only contribute up to that limit or your total compensation, whichever is smaller.
  • You can withdraw money penalty-free once you separate from your employer or reach age 59½, unlike a 401(k) which charges a 10% penalty for early withdrawal before 59½.
  • If your employer offers a match, it's information programs added to your account, so contributing enough to get the full match is usually worth doing.

How contributions work and what the annual limit is

You choose a percentage of your gross pay to contribute to your 457(b), and your employer deducts that amount before calculating your income tax. This reduces your taxable income for the year. For example, if you earn $50,000 and contribute $10,000 to your 457(b), you only pay income tax on $40,000.

The IRS sets a maximum contribution limit each year. That limit changes annually to account for inflation. You cannot contribute more than that limit, and you also cannot contribute more than your total compensation for the year. If you're near retirement, the IRS allows a catch-up contribution — a higher limit for people age 50 and older — so you can save more in your final working years.

Your employer may also contribute to your account through a matching program. A common match is 50% of what you contribute, up to 6% of your salary. If your employer offers a match, contributing enough to capture the full match is usually the smartest move, because it's when ready return on your money.

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

Both are retirement savings plans, but they're built for different employers and have different rules. A 401(k) is for private companies; a 457(b) is for government agencies and nonprofits. The contribution limits are the same, but the withdrawal rules are different.

With a 401(k), you generally cannot withdraw money before age 59½ without paying a 10% penalty on top of income tax. A 457(b) is more flexible: you can withdraw money penalty-free once you separate from your employer, regardless of your age. This makes a 457(b) valuable if you plan to retire before 59½.

Another difference: a 457(b) is not protected by ERISA (the Employee Retirement Income Security Act), which means the rules around what happens to your money if your employer faces financial trouble are different. Your money is held in a trust, but the specifics depend on how your employer set up the plan.

Investment options and how your money grows

Your employer chooses which investments you can pick from. Most 457(b) plans offer a menu of mutual funds — stock funds, bond funds, money market funds — and sometimes a stable value fund that acts like a savings account with a may provide interest rate. You can usually move your money between these options a few times per year.

The money you contribute and any earnings it generates grow tax-free while it sits in the account. If you invest in a stock fund and it gains 8% in a year, you don't owe tax on that 8% gain. That tax-free growth compounds year after year, which is why starting early matters even if you can only contribute a small amount.

The risk is yours to manage. If you pick aggressive stock funds and the market drops, your balance drops too. If you pick conservative funds, your growth will be slower but steadier. Most plans offer a target-date fund — a fund that automatically shifts from stocks to bonds as you approach retirement — which handles this balancing for you.

When you can withdraw money and what happens then

You can withdraw money from your 457(b) without penalty once you separate from your employer, no matter your age. You can also withdraw penalty-free once you reach age 59½, even if you're still working. Some plans allow loans against your balance, though not all do.

When you withdraw, you owe income tax on the full amount withdrawn. If you withdraw $20,000, you'll owe federal income tax (and possibly state and local tax, depending on where you live) on that $20,000. Your employer or the plan administrator will usually withhold a default amount for taxes, but you can adjust that withholding if you want to.

You're not required to start withdrawing at any specific age, unlike a traditional IRA or 401(k), which require withdrawals starting at age 73. This gives you flexibility to let the money keep growing if you don't need it yet.

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

If you leave your government job, your 457(b) stays yours. You cannot touch it penalty-free until you separate from service, but once you do, the money is available. You have several options: leave it in the plan if your former employer allows it, roll it into an IRA, or roll it into a 457(b) at your new employer if you move to another government job.

Rolling the money into an IRA is common. You work with the plan administrator to move the funds directly to an IRA you open — this is called a direct rollover and avoids taxes and penalties. You can also take the money as a check and deposit it yourself, but then you have 60 days to get it into an IRA or you'll owe taxes and possibly penalties.

If you move to another government job with a 457(b), you can roll your old balance into the new plan. This keeps everything in the 457(b) system and preserves the penalty-free withdrawal rules. Ask your new employer's benefits office whether they accept rollovers.

Employer matching and why it matters

Not all 457(b) plans include an employer match, but many do. A match is information programs your employer adds to your account based on how much you contribute. A typical match might be 50% of what you contribute, up to 6% of your salary. If you earn $60,000 and contribute 6% ($3,600), your employer adds 50% of that ($1,800).

If your employer offers a match and you don't contribute enough to get it, you're leaving money on the table. Even if you're tight on cash, contributing enough to capture the full match is usually worth it. It's an when ready 50% return on your money, which is hard to beat.

Some employers match dollar-for-dollar up to a certain percentage, or use a different formula. Check your plan documents or ask your benefits office what your employer's match is. If there's no match listed, your employer doesn't offer one — but that doesn't mean you shouldn't contribute anyway.

Frequently Asked Questions

Can I withdraw money from my 457(b) before I leave my job?

Most plans don't allow withdrawals while you're still employed, except for loans (if your plan offers them) or in cases of financial hardship. Once you separate from your employer, the money becomes available. Some plans have a "unforeseeable emergency" provision that allows early withdrawal, but the definition is strict and approval is not may provide.

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

A traditional 457(b) reduces your taxes now (you contribute pre-tax dollars), but you pay tax when you withdraw. A Roth 457(b) uses after-tax dollars, so you pay tax now, but withdrawals in retirement are tax-free. Some employers offer both, and you can split your contributions between them. Choose Roth if you expect to be in a higher tax bracket in retirement.

What happens to my 457(b) if my employer goes bankrupt?

Your money is held in a trust separate from your employer's assets, so it's protected if the employer faces financial trouble. However, the exact protections depend on how your plan is structured. Ask your benefits office whether your plan is a "governmental" or "nongovernmental" 457(b), as the rules differ slightly.

Do I have to contribute to a 457(b) if my employer offers one?

No, contributing is optional. However, if your employer offers a match, you're giving up information programs by not contributing. Even a small contribution — enough to capture the full match — is usually worth doing.

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

Yes, if you work two jobs — one at a government agency with a 457(b) and one at a private company with a 401(k). However, the annual contribution limits explore across all plans combined. If you max out a 457(b), you cannot contribute to a 401(k) in the same year, and vice versa.