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 savings account offered by state agencies, city and county governments, school districts, and some tax-exempt organizations. You contribute money from your paycheck before taxes are taken out, which lowers your taxable income for that year. The money grows without being taxed until you withdraw it in retirement.

The main difference between a 457(b) and a 401(k) is who can use it. A 401(k) is for employees of private companies. A 457(b) is specifically for government workers and employees of certain nonprofits. The rules are similar in many ways, but 457(b) plans have some unique features that make them worth understanding if your employer offers one.

Your employer does not contribute to the account unless they choose to — that is up to them. The money in your 457(b) comes from your own paycheck, and you decide how much to contribute each year, up to an annual limit set by the IRS.

Key Takeaways

  • A 457(b) plan lets you set aside money from your paycheck before taxes, reducing what you owe the IRS that year.
  • Your contributions grow tax-free until you withdraw the money, usually in retirement or when you leave your job.
  • The money belongs to you, not your employer, even if you leave your job before retirement.
  • You can withdraw money from a 457(b) without the 10 percent early withdrawal penalty that applies to 401(k)s and IRAs, as long as you separate from service or face a financial hardship.
  • Your employer chooses which investment options to offer inside the plan, so the choices available depend on where you work.

How contributions and tax deferral work

When you enroll in your employer's 457(b) plan, you tell them what percentage of your paycheck to contribute. That amount comes out before federal income tax is calculated, which means your taxable income for the year is lower. If you earn $50,000 and contribute $10,000 to a 457(b), you only pay federal income tax on $40,000.

The IRS sets an annual contribution limit. This limit changes each year and is the same for 457(b) plans, 401(k)s, and 403(b)s. If you are age 50 or older, you may be able to contribute an additional amount called a catch-up contribution. Your employer's benefits office can tell you the current limits and whether catch-up contributions are available in your plan.

You do not pay taxes on the money you contribute or on any growth it earns while it sits in the account. Taxes are due only when you take the money out. This is why it is called a tax-deferred plan — you are deferring, or postponing, the taxes until later.

Investment choices and how your money grows

Inside your 457(b), your contributions are invested in options your employer has selected. These are typically mutual funds, stable value funds, or target-date funds. You choose how to split your money among these options when you enroll, and you can usually change your choices a few times per year.

The growth of your account depends on how the investments perform. If the stock market rises, your account may grow faster. If the market falls, your account value may drop. Your employer does not may provide any return on your money — the risk is yours.

Some plans offer a stable value option, which is a fund that aims to preserve your principal and pay a modest interest rate. This is less risky than stock funds but typically grows more slowly. Many people split their contributions between stable value and stock funds to balance safety and growth.

When you can withdraw money without penalties

One major advantage of a 457(b) is that you can withdraw money without the 10 percent early withdrawal penalty that applies to 401(k)s and IRAs, as long as you meet certain conditions. You can withdraw without penalty if you separate from service — meaning you leave your job — at any age. You do not have to wait until 59½ like you do with a 401(k).

You can also withdraw money if you face an unforeseeable financial hardship. Your plan document defines what counts as a hardship, but examples typically include medical expenses, loss of your home, or a natural disaster. You will need to provide documentation to your plan administrator to show the hardship is real.

Even if you withdraw early without penalty, you still owe income tax on the money you take out. The tax is due in the year you withdraw. Your plan will withhold a percentage for taxes, but you may owe more when you file your tax return.

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

The money in your 457(b) belongs to you, not your employer. If you leave your job, the account stays yours. You do not lose it, and your employer cannot take it back. You will need to decide what to do with the money: leave it in the plan, roll it to another retirement account, or withdraw it.

If you leave your job and want to keep the money invested, you can often leave it in the plan and let it continue to grow. Your employer will mail you statements, and you can make investment changes if the plan allows it. However, some plans require you to withdraw or move the money once you are no longer employed there.

You can roll your 457(b) balance into an IRA or into a 457(b) plan at a new employer if that employer offers one. A rollover moves the money directly from one account to another without you touching it, which avoids when ready taxes and penalties. Talk to your plan administrator about rollover options before you leave.

Required withdrawals in retirement

Once you reach age 73, the IRS requires you to start taking money out of your 457(b) each year, even if you do not need it. This is called a required minimum distribution, or RMD. The amount is calculated based on your age and account balance. If you do not take the required amount, you owe a penalty to the IRS.

The rules for RMDs are complex and depend on whether you have separated from service. If you are still working at age 73, some plans allow you to delay RMDs until you actually retire. Once you do retire, the RMD rules kick in. Your plan administrator can calculate your RMD for you each year.

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

A 457(b) is designed for government and nonprofit workers, while a 401(k) is for private company employees and a 403(b) is for school and hospital workers. The contribution limits are the same across all three, but the withdrawal rules are different.

With a 401(k) or 403(b), you generally cannot withdraw money before age 59½ without paying a 10 percent penalty on top of income tax. With a 457(b), you can withdraw without penalty once you separate from service, no matter your age. This makes a 457(b) more flexible if you plan to retire before 59½.

Another difference is that a 457(b) is an unfunded plan, meaning your employer does not set aside money in a separate account for you. Your contributions and growth are held in a trust, but they are technically still part of your employer's assets until you withdraw them. This is a technical distinction that rarely affects you as an employee, but it is why 457(b) plans are sometimes called deferred compensation plans.

Frequently Asked Questions

Can my employer match my contributions to a 457(b)?

Some employers do offer matching contributions, but it is not required. A match means your employer adds money to your account based on how much you contribute — for example, 50 cents for every dollar you put in, up to a certain percentage of your salary. Check with your benefits office to see if your employer offers a match and what the terms are.

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

Your beneficiary — the person you named when you enrolled — inherits the account. They can withdraw the money, roll it to their own IRA, or in some cases leave it invested in the plan. The rules vary by plan, so make sure your beneficiary designation is current and talk to your plan administrator about what options your beneficiary will have.

Can I borrow money from my 457(b)?

Some 457(b) plans allow loans, but not all. If your plan offers loans, you typically borrow against your own balance and repay it through payroll deductions. The interest you pay goes back into your account. Ask your benefits office whether loans are available and what the terms are.

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

No, contributing is optional. If your employer offers a 457(b), you can choose to enroll or decline. You can also change your contribution amount or stop contributing at any time. However, if your employer offers a match, you may want to contribute at least enough to get the full match, since that is information programs toward your retirement.

Can I contribute to both a 457(b) and an IRA?

Yes, you can contribute to both in the same year. The contribution limits are separate, so you can max out a 457(b) and still contribute to a traditional or Roth IRA. However, whether you can deduct your IRA contribution depends on your income and whether you have access to other retirement plans, so check with a tax professional about your specific situation.