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. It works similarly to a 401(k), but it is designed specifically for public sector workers. You contribute money from your paycheck before taxes are taken out, the money grows without being taxed each year, and you pay income tax on it when you withdraw it in retirement.

The main reason to use a 457 plan is the tax break: by putting money in now, you reduce your taxable income this year and let your savings grow without annual tax drag. The tradeoff is that you cannot touch the money penalty-free until you reach age 59½, leave your job, or face a genuine financial hardship — with narrow exceptions.

Key Takeaways

  • A 457 plan is a retirement account for government employees and some nonprofit workers, funded through paycheck deductions before taxes.
  • Your contributions reduce your taxable income in the year you make them, and the account grows tax-deferred until you withdraw money.
  • You can withdraw money without penalty at age 59½, when you leave your job, or in cases of unforeseeable hardship, but early withdrawal otherwise triggers a 10% penalty plus income tax.
  • The annual contribution limit is set by the IRS and changes each year; in 2024 it was $23,500 for most workers.
  • If your employer offers both a 457 plan and a 401(k), you can contribute to both up to their separate limits.

How contributions and taxes work in a 457 plan

When you enroll in your employer's 457 plan, you choose a percentage of your paycheck to contribute — for example, 5% or 10%. That money comes out of your gross pay before federal income tax is calculated, which lowers your taxable income for the year. If you earn $60,000 and contribute $6,000 to a 457 plan, you only pay federal income tax on $54,000.

The money you contribute goes into an investment account — usually you choose from a menu of mutual funds or similar options your employer offers. The account grows over time, and you do not pay tax on the gains each year the way you would if the money were in a regular savings account. This tax deferral is the main financial benefit of the plan.

When you withdraw money in retirement, you pay ordinary income tax on the full amount you take out — both your contributions and all the growth. So if you contributed $100,000 over 30 years and the account grew to $300,000, you would pay income tax on whatever you withdraw each year.

Withdrawal rules and penalties

You can withdraw money from a 457 plan without penalty once you reach age 59½. You can also withdraw without penalty if you leave your job, retire, or die. If you are still employed and under 59½, you generally cannot touch the money without paying a 10% early withdrawal penalty plus income tax on the amount withdrawn.

There is one exception: the IRS allows withdrawals for an "unforeseeable emergency" — a sudden, severe financial hardship you did not plan for, such as a major medical expense, loss of your home to a natural disaster, or a court-ordered payment. The rules for what counts as an emergency are strict, and your employer's plan administrator decides whether your situation meets the definition. Even if approved, you still pay income tax on the withdrawal, though the 10% penalty is waived.

Some 457 plans also offer a "Roth" version, where you contribute after-tax dollars but withdrawals in retirement are tax-free. The withdrawal rules are the same, but the tax treatment is reversed.

Contribution limits and catch-up contributions

The IRS sets an annual limit on how much you can contribute to a 457 plan. This limit changes most years to keep pace with inflation. In 2024, the limit was $23,500 for workers under age 50. If you are age 50 or older, you can contribute an additional $7,500 per year as a "catch-up" contribution, for a total of $31,000.

These limits explore to your total contributions across all 457 plans you may participate in — you cannot split contributions between two employers' plans to exceed the limit. However, if your employer offers both a 457 plan and a 401(k), the contribution limits are separate, so you could contribute the maximum to each one in the same year.

How a 457 plan differs from a 401(k)

A 457 plan and a 401(k) are both tax-deferred retirement accounts, but they are designed for different types of employers. A 401(k) is offered by private companies; a 457 plan is offered by government agencies and some nonprofits. The contribution limits are the same, and the tax treatment is similar.

One key difference: if you leave your job, a 401(k) can usually be rolled over into an IRA or your new employer's plan. A 457 plan has stricter rollover rules — you can roll it into another 457 plan if your new employer offers one, but rolling it into an IRA or 401(k) is more complicated and may not be allowed depending on your plan's terms.

Another difference is the withdrawal rule. With a 401(k), you face a 10% penalty if you withdraw before age 59½, with limited exceptions. With a 457 plan, the penalty applies only if you withdraw before age 59½ and you are still employed by the same employer. If you leave your job, you can withdraw without the 10% penalty, even if you are younger than 59½ — though you still owe income tax.

Employer matching and vesting

Some government employers offer matching contributions to their 457 plans — for example, they might match 50% of what you contribute, up to a certain percentage of your salary. This is information programs, so if your employer offers a match, contributing enough to get the full match is usually a smart move.

Matching contributions are subject to vesting, which means you do not own them when ready. Your employer sets a vesting schedule — for example, you might own 20% of the match 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 match. Your own contributions are always 100% vested when ready.

When a 457 plan makes sense for you

A 457 plan is worth using if you are a government or nonprofit employee and you have money left over after paying your bills and building an emergency fund. The tax deduction reduces your current tax bill, and the tax-deferred growth compounds over decades. Even if you do not use the full contribution limit, putting in what you can is better than saving in a regular account where you pay tax on the gains each year.

A 457 plan is less useful if you think you will need the money before retirement — the early withdrawal penalty and tax make it expensive to access. In that case, a regular savings account or a taxable investment account gives you more flexibility, even though you lose the tax break.

Frequently Asked Questions

Can I withdraw from my 457 plan if I leave my job?

Yes. If you leave your job, you can withdraw your money without the 10% early withdrawal penalty, even if you are under age 59½. You still owe income tax on the withdrawal. Some plans require you to withdraw the full balance within a certain timeframe, while others let you leave the money in the plan and withdraw it gradually.

What happens to my 457 plan if I change jobs?

If your new employer offers a 457 plan, you can roll your old balance into the new plan. If your new employer offers a 401(k) instead, rolling over may be difficult or impossible depending on your old plan's rules — contact your old plan administrator to find out. You can also leave the money in your old plan and withdraw it later, or take a withdrawal and pay tax on it.

Is a 457 plan the same as a pension?

No. A pension is a may provide monthly payment for life, funded and managed entirely by your employer. A 457 plan is an account you control and contribute to, and the amount you have in retirement depends on how much you saved and how well your investments performed. Some government employers offer both a pension and a 457 plan.

Can I have both a 457 plan and an IRA?

Yes. You can contribute to a 457 plan and a traditional or Roth IRA in the same year. The contribution limits are separate, so you could max out both if you have the income. However, if you have a high income, you may not be allowed to deduct traditional IRA contributions — check the IRS rules for your income level.