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 tax-exempt organizations like hospitals and universities. It works similarly to a 401(k) — 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 withdrawals in retirement.

The key difference from a 401(k) is who can have one. You cannot open a 457 plan on your own. Your employer must offer it, and you must work for a government agency or a may have access to nonprofit. If your employer offers a 457, you decide how much to contribute each pay period, and your employer deducts that amount from your gross pay.

The money you contribute reduces your taxable income for the year you contribute it. For example, if you earn $50,000 and contribute $5,000 to a 457 plan, you only pay income tax on $45,000. The $5,000 grows tax-free until you withdraw it, usually after you retire.

Key Takeaways

  • A 457 plan is only available through your employer if you work for a government agency or certain nonprofits — you cannot open one independently.
  • Money you contribute comes out of your paycheck before income tax is calculated, lowering your taxable income for that year.
  • Your contributions and earnings grow without being taxed each year, but you pay income tax on withdrawals after age 59½ or when you leave your job.
  • The 2024 contribution limit is $23,500 per year, or $35,250 if you are age 50 or older and your plan allows catch-up contributions.
  • Unlike a 401(k), a 457 plan does not impose a 10% early withdrawal penalty if you take money out before age 59½, as long as you have separated from your employer.

How contributions and earnings grow tax-free

When you contribute to a 457 plan, the money is invested according to choices your plan offers — typically mutual funds, target-date funds, or stable value funds. Each year, any earnings your investments generate (interest, dividends, capital gains) are not taxed. This tax-free growth compounds over time, meaning your money grows faster than it would in a regular savings account or taxable investment account.

You do not pay any tax on those earnings until you withdraw the money. If your $5,000 contribution grows to $8,000 over five years, you do not owe tax on that $3,000 gain until you take it out. This is what makes 457 plans powerful for long-term retirement savings — the tax deferral lets your balance grow larger than it otherwise would.

Contribution limits and catch-up contributions

For 2024, you can contribute up to $23,500 per year to a 457 plan. This limit is set by the IRS and may change each year. Your employer deducts this amount from your paychecks throughout the year, usually spread evenly across each pay period.

If you are age 50 or older, your plan may allow catch-up contributions — an additional $7,750 per year in 2024, for a total of $31,250. Not all plans offer this option, so check with your plan administrator to see if yours does. Some plans also have a special catch-up rule that allows you to contribute more in the three years before you retire, if you have not maxed out contributions in earlier years.

These limits explore only to your contributions. If your employer makes matching contributions (some do, though it is less common than with 401(k) plans), those do not count toward your personal limit.

When you can withdraw money without penalty

A major advantage of a 457 plan is that you can withdraw money without the 10% early withdrawal penalty that applies to 401(k)s and IRAs, as long as you have separated from service — meaning you no longer work for that employer. If you leave your job at age 45, you can start taking withdrawals from your 457 without owing a penalty, even though you are well before the normal retirement age of 59½.

You still owe income tax on the money you withdraw, but there is no additional penalty. This makes a 457 plan particularly useful if you plan to retire before age 59½ or if you change jobs frequently. However, if you are still employed by the same employer, you generally cannot withdraw money before age 59½ without penalty, with limited exceptions for financial hardship.

Once you reach age 73, you must begin taking required minimum distributions (RMDs) from your 457 plan, whether you are still working or not. Your plan will calculate how much you must withdraw each year based on your age and account balance.

The difference between a 457(b) and a 457(f) plan

There are two types of 457 plans: 457(b) and 457(f). The vast majority of government employees have access to a 457(b) plan. These are the plans described above, with the contribution limits and withdrawal rules outlined in this article.

A 457(f) plan is much rarer and is offered only to certain highly paid employees of nonprofits, such as executives or senior administrators. The rules are different — contributions are not deducted from your paycheck before taxes, and the money is not protected from your employer's creditors the way 457(b) money is. Unless your employer specifically told you that you have a 457(f), you almost certainly have a 457(b).

How a 457 plan differs from a 401(k)

Both 457 and 401(k) plans let you save for retirement with pre-tax contributions and tax-deferred growth. However, they have important differences. A 401(k) is offered by private employers, while a 457 is offered by government and nonprofit employers. The early withdrawal penalty rules are opposite: a 457 has no penalty if you separate from service before 59½, while a 401(k) charges a 10% penalty for early withdrawals (with some exceptions). A 401(k) allows loans from your account; most 457 plans do not.

If you work for a government employer, you may have access to both a 457 plan and a 401(k) or 403(b) plan. You can contribute to both in the same year, but your combined contributions cannot exceed the annual limit set by the IRS (which is higher when you have access to multiple plans). Ask your employer's benefits office whether you are may be able to access for more than one plan.

What happens to your 457 when you leave your job

When you separate from your employer, you have several options for your 457 balance. You can leave the money in the plan and take withdrawals as needed. You can roll the money into an IRA or into a 457 plan offered by a new government employer. You can also roll it into a 401(k) or 403(b) if your new employer offers one, though some plans do not accept 457 rollovers.

The rules for rollovers are strict — if you do not complete the rollover correctly, the entire amount becomes taxable when ready and you may owe penalties. Before you move your money, contact both your old plan administrator and your new plan or IRA provider to confirm the correct procedure. Many people work with a tax professional or financial advisor to handle this step.

If you do not roll over the money and straightforward leave it in your old employer's plan, you can still withdraw it whenever you want after you separate from service, without the 10% early withdrawal penalty. You will owe income tax on the amount you withdraw.

Frequently Asked Questions

Can I have a 457 plan if I work for a private company?

No. A 457 plan is only available through government employers (federal, state, or local agencies) or certain tax-exempt organizations. If you work for a private company, your employer may offer a 401(k) instead. Ask your benefits office what retirement plans are available to you.

What happens if I withdraw money before age 59½ while still employed?

If you are still working for the employer that sponsors your 457 plan, you generally cannot withdraw money before age 59½ without owing a 10% penalty, unless your plan allows withdrawals for financial hardship. Once you leave that job, the penalty no longer applies. Check your plan documents or ask your benefits office about hardship withdrawal rules.

Can I roll my 457 into an IRA?

Yes, but only after you have separated from your employer. You can roll a 457(b) into a traditional IRA or into another 457 plan. The rollover must be done correctly to avoid taxes and penalties — contact your plan administrator for the exact procedure before you move the money.

Do I have to contribute to my employer's 457 plan?

No. Contributing to a 457 plan is optional. Your employer cannot force you to contribute. However, if you do not contribute, you miss out on the tax advantages and the chance to save for retirement through payroll deductions. Some employers offer matching contributions, which means information programs if you contribute.

What if my employer stops offering a 457 plan?

If your employer discontinues the plan, you will be notified and given options for your balance — usually you can roll it into an IRA, leave it in the old plan, or transfer it to another employer's plan if you change jobs. Your plan administrator will explain the process and timeline.