A 457(b) plan is a retirement savings account for employees of state and local governments and certain nonprofits

A 457(b) plan is a tax-deferred retirement account that lets you set aside money from your paycheck before taxes are taken out. The money grows without being taxed until you withdraw it in retirement. Unlike a 401(k), which is common in the private sector, a 457(b) is designed specifically for public employees — people who work for state agencies, cities, counties, school districts, and some tax-exempt organizations.

The main appeal is that you reduce your taxable income now and let your savings compound over decades. You control how the money is invested, usually choosing from a menu of mutual funds or other options your employer offers. When you leave your job or retire, you can start taking money out, and that is when you pay income tax on it.

A 457(b) is not the same as a pension. A pension pays you a fixed amount each month for life. A 457(b) is a pot of money you build yourself, and how long it lasts depends on how much you saved and how much you spend.

Key Takeaways

  • A 457(b) plan lets you contribute pre-tax money from your paycheck, reducing what you owe in taxes this year.
  • Your contributions and investment earnings grow tax-deferred, meaning you pay no tax on the growth until you withdraw the money.
  • Contribution limits are set by the IRS each year and are separate from 401(k) limits, so you can save more if you have access to both.
  • You can withdraw money without penalty once you leave your job or reach age 59½, depending on your plan rules.
  • A 457(b) is offered only by government employers and certain nonprofits, not by private companies.

How contributions and investment growth work

When you enroll in your employer's 457(b) plan, you choose a percentage of your paycheck to contribute. That money is deducted before your employer calculates your income tax, which lowers your federal and state tax bill for the year. For example, if you earn $50,000 and contribute $10,000 to your 457(b), you report only $40,000 as taxable income.

Your contributions are invested in the funds you select — typically a mix of stock and bond mutual funds, target-date funds, or stable value funds. The money you invest and any earnings it generates are not taxed while they sit in the account. If your $10,000 grows to $15,000 over five years, that $5,000 gain is not taxed yet. You pay tax only when you withdraw the money, usually after you retire.

This tax deferral is powerful because your money compounds without being reduced by taxes each year. Over 20 or 30 years, the difference between a taxable account and a tax-deferred account can be substantial.

Annual contribution limits and catch-up contributions

The IRS sets a limit on how much you can contribute to a 457(b) each year. For 2024, the limit is $23,500 (this amount changes annually). You can contribute up to that limit, and your employer cannot force you to contribute more or less than you choose.

If you are age 50 or older, you can make an additional catch-up contribution of $7,500 per year, bringing your total to $31,000. This is designed to help workers who started saving late or want to boost their retirement savings in their final working years.

These limits are separate from any 401(k) or 403(b) limits. If your spouse works for a private employer and has a 401(k), and you have a 457(b), you can each contribute the full amount to your own plan. However, if your government employer offers both a 457(b) and a 403(b), the limits combine — you cannot contribute $23,500 to each.

When you can withdraw money without penalty

One key difference between a 457(b) and a 401(k) is the withdrawal rule. With a 401(k), you generally face a 10% penalty if you withdraw before age 59½. With a 457(b), you can withdraw money without penalty once you leave your job, regardless of your age. If you retire at 52, you can start taking money out at 52.

You can also withdraw money at age 59½ while still employed, just as with a 401(k). Some plans allow you to withdraw money for a financial hardship, though the definition of hardship varies by plan. Check your plan documents or ask your benefits administrator what counts as a hardship withdrawal in your plan.

When you withdraw money, you owe income tax on the full amount withdrawn. If you withdraw $5,000, you report that $5,000 as income and pay tax at your ordinary income tax rate. There is no special tax rate for 457(b) withdrawals.

Roth 457(b) options and tax planning

Some government employers now offer a Roth 457(b) option alongside the traditional 457(b). With a Roth, you contribute money that has already been taxed. Your paycheck is reduced by the contribution, but you do not get a tax deduction. The advantage is that your money grows tax-free, and you withdraw it tax-free in retirement.

Choosing between traditional and Roth depends on your tax situation. If you expect to be in a higher tax bracket in retirement, a Roth may save you money. If you expect to be in a lower bracket, the traditional 457(b) may be better. Some people split their contributions between both types to hedge their bets.

Your employer's plan documents will tell you whether a Roth option is available. Not all government employers offer it yet.

What happens to your 457(b) when you leave your job

When you leave your job, you have several options for your 457(b) balance. You can leave the money in the plan if your employer allows it, withdraw it in a lump sum, take it out over time, or roll it into an IRA or another employer's plan.

If you roll the money into a traditional IRA, it continues to grow tax-deferred. If you roll it into a Roth IRA, you owe income tax on the amount rolled, but future growth is tax-free. If you take a lump sum, you owe income tax on the entire amount in that year, which could push you into a higher tax bracket.

Some people use a substantially equal periodic payment (SEPP) strategy to withdraw money gradually and avoid a large tax bill in one year. This requires you to take roughly equal payments over your life expectancy, calculated using IRS tables. If you leave your job at 55, you could start SEPP withdrawals at 55 without the 10% penalty that would explore to a 401(k).

How a 457(b) differs from a 401(k) and 403(b)

A 457(b) is similar to a 401(k) and 403(b) in that all three are tax-deferred retirement plans with annual contribution limits. The main differences are who can use them and when you can withdraw without penalty.

A 401(k) is for private company employees. A 403(b) is for employees of schools, colleges, and certain nonprofits. A 457(b) is for government workers and some nonprofits. The 401(k) and 403(b) penalize early withdrawal before 59½, but the 457(b) does not — you can withdraw at any age once you leave your job.

Another difference: 457(b) plans are not subject to the same creditor protection rules as 401(k)s in some states. If you face a lawsuit or bankruptcy, a 401(k) is generally protected, but a 457(b) may not be. Check your state's laws if this is a concern.

Frequently Asked Questions

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

Yes, if you have access to both. The contribution limits are separate, so you can contribute the full $23,500 to each plan in 2024. However, if your government employer offers both a 457(b) and a 403(b), the limits combine — you can contribute a total of $23,500 across both, not $23,500 to each.

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

Your beneficiary — usually your spouse or children — inherits the balance. They can roll it into an inherited IRA, take it as a lump sum, or take it over time, depending on the plan and their relationship to you. The plan documents name your beneficiary, so make sure that information is current.

Do I have to withdraw my 457(b) at a certain age?

Yes. You must begin taking required minimum distributions (RMDs) at age 73 (as of 2023; this age may change). The amount is calculated based on your age and account balance using IRS tables. If you do not take the RMD, you owe a penalty equal to 25% of the shortfall (reduced to 10% if you correct it within two years).

Can I borrow from my 457(b) plan?

Some plans allow loans, but not all. If your plan permits it, you can usually borrow up to 50% of your balance or $50,000, whichever is less. You repay the loan with interest, and the interest goes back into your account. Ask your benefits administrator whether loans are available in your plan.

Is my 457(b) protected if I file for bankruptcy?

This varies by state. Federal law protects 401(k)s in bankruptcy, but 457(b)s are not always protected the same way. Some states protect them fully, others partially, and some do not. If bankruptcy is a possibility, speak with a bankruptcy attorney in your state about how your 457(b) would be treated.