What a 457(b) plan is and who can use one

A 457(b) plan is a tax-deferred retirement savings account offered by state and local government employers and some tax-exempt organizations. The "b" refers to section 457(b) of the Internal Revenue Code. Unlike a 401(k), which is common in the private sector, a 457(b) is designed specifically for public employees — teachers, police officers, firefighters, county workers, and staff at nonprofits.

Your employer must sponsor the plan for you to have one. You cannot open a 457(b) on your own. If your employer offers it, you decide whether to participate and how much to contribute from your paycheck. The money grows tax-deferred, meaning you do not pay income tax on the contributions or the earnings until you withdraw the money in retirement.

There are two types of 457 plans: the 457(b), which is the most common, and the 457(f), which applies to a smaller group of highly paid government officials. This guide focuses on the 457(b).

Key Takeaways

  • A 457(b) is a retirement savings plan for state, local government, and certain nonprofit employees, funded through payroll deductions.
  • Contributions reduce your taxable income for the year you make them, and the money grows without being taxed until withdrawal.
  • The contribution limit for 2024 is $23,500 per year, or $35,250 if you are age 50 or older and your plan allows catch-up contributions.
  • You can withdraw money from a 457(b) without the 10 percent early withdrawal penalty that applies to 401(k)s, but you still owe income tax on the amount withdrawn.
  • If you leave your job, you can roll your 457(b) balance into an IRA or another employer plan, or take a lump-sum payment and pay taxes on it when ready.

How contributions work and what you can contribute each year

You contribute to a 457(b) through payroll deductions. Your employer withholds the amount you choose from each paycheck and deposits it into your plan account. The contribution comes out before income tax is calculated, so it lowers your taxable income for that year.

The maximum you can contribute in 2024 is $23,500 per year. This limit applies to all of your 457(b) accounts combined — if you work for two government employers that both offer 457(b) plans, your total contributions to both cannot exceed $23,500 in a single year. The IRS adjusts this limit annually for inflation, usually in $500 increments.

If you are age 50 or older, your plan may allow catch-up contributions, which let you contribute an additional $7,750 in 2024, for a total of $31,250. Not all plans offer catch-up contributions, so check with your employer's benefits office to see if yours does. Some plans also have a special catch-up rule in the final three years before your normal retirement age, allowing you to contribute up to twice the annual limit if you did not max out contributions in earlier years.

Your employer may also make matching contributions to your account, similar to a 401(k) match. The terms vary by employer — some match a percentage of what you contribute, others do not match at all. Check your plan documents or ask your benefits administrator what your employer offers.

Tax treatment: when you pay taxes on your money

A 457(b) is a pre-tax account, meaning contributions reduce your income tax bill in the year you make them. If you earn $60,000 and contribute $5,000 to your 457(b), you report only $55,000 as taxable income on your federal tax return. This tax break applies to federal, state, and local income taxes.

The earnings inside your account — interest, dividends, and investment gains — are not taxed while the money sits in the plan. You pay tax only when you withdraw the money. At that point, the entire amount you withdraw (both your contributions and the earnings) is taxed as ordinary income at whatever tax rate applies in the year of withdrawal.

If you withdraw money before age 59½, you do not owe the 10 percent early withdrawal penalty that applies to 401(k)s and traditional IRAs. This is a significant difference: a 457(b) allows penalty-free withdrawals at any age, as long as you have separated from service (left your job). However, you still owe regular income tax on the amount withdrawn.

Withdrawal rules and when you can access your money

The rules for withdrawing from a 457(b) depend on whether you are still working or have left your job. While you are employed, most plans allow you to withdraw money only in cases of financial hardship, as defined by the plan. Hardship definitions vary, but typically include medical expenses, home repairs, education costs, or preventing eviction or foreclosure. You must request a hardship withdrawal through your employer, and the plan administrator decides whether your situation meets the criteria.

Once you separate from service — meaning you leave your job — you can withdraw your entire balance without restriction. You can take it all at once as a lump sum, or you can arrange for periodic payments over time. You owe income tax on whatever you withdraw, but there is no penalty for early withdrawal even if you are younger than 59½.

If you do not need the money when ready, you can leave it in the plan and let it continue to grow tax-deferred. Many plans allow you to delay withdrawals indefinitely, though some require you to begin withdrawals by age 72 (the age when required minimum distributions, or RMDs, typically begin). Check your plan documents to see if your plan has an RMD requirement.

Rolling over or transferring your 457(b) balance

When you leave your job, you have several options for what to do with your 457(b) balance. One option is to roll over the money into a traditional IRA. A rollover moves the funds directly from your 457(b) to the IRA without triggering a tax bill, as long as the transfer happens within 60 days. This preserves the tax-deferred status of your money and gives you more investment choices, since IRAs typically offer a wider range of investment options than employer plans.

Another option is to roll the money into a 401(k) or 403(b) plan if your new employer offers one. Not all plans accept rollovers from 457(b)s, so you will need to check with your new employer's benefits office first. A direct rollover (where the money moves from plan to plan without passing through your hands) avoids taxes and penalties.

You can also leave the money in your former employer's 457(b) plan if the plan allows it. This keeps your money in the same account and may be useful if you want to delay withdrawals or keep your investments the same. However, you lose the ability to make new contributions once you have separated from service.

If you take a lump-sum distribution — meaning you withdraw the entire balance and receive a check — you owe income tax on the full amount in the year you receive it. If you do not roll the money over within 60 days, your employer may also withhold 20 percent of the distribution for federal income tax, which you will need to account for when you file your tax return.

How a 457(b) compares to other retirement plans

A 457(b) differs from a 401(k) in several important ways. Both are employer-sponsored plans with similar contribution limits, but a 457(b) does not impose the 10 percent early withdrawal penalty if you leave your job before age 59½. A 401(k) does impose this penalty, making the 457(b) more flexible if you retire early or change jobs. However, a 401(k) is more widely available since it is offered by most private employers, while a 457(b) is limited to government and nonprofit workers.

A 457(b) also differs from a 403(b), which is offered by schools, hospitals, and other tax-exempt organizations. Both have similar contribution limits and tax treatment, but a 403(b) is more common in education and healthcare. Some nonprofit employees have access to both a 403(b) and a 457(b), and can contribute to each up to the annual limit — though the combined total across all employer plans cannot exceed the annual limit.

A traditional IRA is available to anyone with earned income, regardless of employer, and has a much lower contribution limit ($7,000 in 2024, or $8,000 if age 50 or older). An IRA offers more investment flexibility than an employer plan, but an employer plan like a 457(b) may offer employer matching contributions, which an IRA does not.

Special rules for 457(b) plans at nonprofits

Some tax-exempt organizations, such as hospitals and universities, offer 457(b) plans to their employees. These nonprofit 457(b) plans follow the same contribution limits and tax rules as government 457(b) plans. However, nonprofit plans sometimes have different investment options or withdrawal rules, so it is important to review your specific plan documents.

If you work for a nonprofit and have both a 403(b) and a 457(b) available, you can contribute to both in the same year. Your contributions to each plan count separately toward the annual limit, so you could contribute up to $23,500 to a 403(b) and another $23,500 to a 457(b) in 2024, for a combined total of $47,000. This is different from the rule for multiple 457(b) accounts, where contributions across all 457(b)s are combined and cannot exceed the annual limit.

Frequently Asked Questions

Can I withdraw from my 457(b) before I retire?

While employed, you can withdraw money only for financial hardship as defined by your plan. Once you leave your job, you can withdraw any amount without penalty, though you will owe income tax. If you are still working and do not have a hardship, you must wait until you separate from service to access your money.

What happens to my 457(b) if I change jobs?

Your 457(b) balance stays in your former employer's plan unless you move it. You can roll it into an IRA or another employer plan, leave it where it is, or take a lump-sum distribution and pay taxes on it. A direct rollover to an IRA avoids taxes and penalties and gives you more control over your investments.

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

Most 457(b) plans require you to begin withdrawals by age 72, following the same required minimum distribution rules as IRAs and 401(k)s. Some plans allow you to delay withdrawals longer if you are still working. Check your plan documents or contact your benefits administrator to learn your plan's specific rules.

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

If you work for two employers — one offering a 457(b) and one offering a 401(k) — you can contribute to both. However, your combined contributions across all employer plans cannot exceed the annual limit ($23,500 in 2024). Contributions to a 457(b) and a 401(k) are tracked separately, but they share the same annual ceiling.

Is my 457(b) protected if my employer goes bankrupt?

Unlike a 401(k), a 457(b) is not protected by ERISA (the Employee Retirement Income Security Act). This means your balance is technically an asset of your employer and could be at risk if the employer faces financial difficulties. However, most government employers are stable, and nonprofit plans typically hold assets in trust. Review your plan documents or ask your benefits office about the protections in place for your specific plan.