A 457(b) is a retirement savings account for government and nonprofit employees

A 457(b) plan is a tax-deferred retirement savings account offered by state and local government employers and certain nonprofit organizations. Money you contribute comes out of your paycheck before taxes are calculated, which lowers your taxable income for the year. The money grows tax-free until you withdraw it in retirement, when you will owe income tax on the full amount.

The key difference between a 457(b) and a 401(k) is who offers it: a 457(b) comes from a government agency or tax-exempt nonprofit, while a 401(k) comes from a private employer. If you work for a city, county, state agency, public school, hospital, or charitable organization, your employer may offer a 457(b). If you work for a private company, you would have a 401(k) instead.

A 457(b) is not the same as Social Security. It is a separate savings plan that you control, and the money belongs to you. Your employer may contribute to it, but most of the time you decide how much to set aside from your own paycheck.

Key Takeaways

  • A 457(b) is offered only by government agencies and certain nonprofits, and contributions reduce your taxable income in the year you make them.
  • You can contribute up to a set annual limit, which changes each year and is higher than the limit for IRAs but similar to 401(k) limits.
  • Money in a 457(b) grows tax-free, but you pay income tax when you withdraw it after leaving your job or reaching age 59½.
  • Unlike a 401(k), a 457(b) has no early withdrawal penalty if you leave your job, though you still owe income tax on the money.
  • Your employer may match part of your contributions, but this varies widely depending on the organization.

How contributions and tax deductions work

When you enroll in a 457(b), you choose a percentage of your paycheck to contribute. That amount is deducted before your employer calculates federal income tax, which means your taxable income for the year is lower. For example, if you earn $50,000 and contribute $5,000 to a 457(b), you report only $45,000 as taxable income on your federal tax return.

The IRS sets an annual contribution limit, which increases most years to account for inflation. The limit applies to the total you contribute from your own paycheck plus any employer match. You can find the current year's limit on the IRS website or ask your plan administrator. If you are age 50 or older, you may be able to contribute an additional amount called a catch-up contribution.

Your employer may contribute to your account as well. Some government agencies and nonprofits offer a match — for example, they might contribute 50 cents for every dollar you contribute, up to a certain percentage of your salary. Others offer a flat contribution to all employees. Check your plan documents or ask your human resources department what your employer offers.

When you can withdraw money and what happens to it

You can withdraw money from a 457(b) without a penalty once you leave your job or reach age 59½, whichever comes first. This is different from a 401(k), which charges a 10 percent early withdrawal penalty if you take money out before age 59½ and you are still working for that employer. With a 457(b), the penalty does not explore, but you still owe regular income tax on the withdrawal.

When you leave your job, you have several options. You can leave the money in the plan and withdraw it later, roll it over into an IRA or another employer's plan, or take a lump-sum distribution. If you take a lump sum, the entire amount is added to your income for that tax year, which may push you into a higher tax bracket. Many people spread withdrawals over several years to keep their taxable income lower each year.

If you do not withdraw the money by age 73, the IRS requires you to begin taking minimum distributions. The amount is calculated based on your age and account balance. Your plan administrator will tell you how much you must withdraw each year.

The difference between a 457(b) and other retirement plans

A 457(b) is similar to a 401(k) in that both are employer-sponsored plans with annual contribution limits and tax-deferred growth. The main differences are who offers them and what happens if you leave your job early. A 401(k) is offered by private employers; a 457(b) is offered by government and nonprofit employers. A 401(k) charges a 10 percent penalty for early withdrawal before age 59½; a 457(b) does not.

A 457(b) is different from a traditional IRA or Roth IRA, which are individual accounts you open on your own, not through an employer. IRAs have much lower annual contribution limits than a 457(b). You can have both an IRA and a 457(b) at the same time, but your total contributions to all retirement accounts in a year cannot exceed the IRS limits for each type.

If your employer offers both a 457(b) and a 401(k) — which is rare but does happen at some large organizations — you can contribute to both, but your combined contributions cannot exceed the annual limit for that year.

Investment options and how your money grows

Your 457(b) plan offers a menu of investment choices, typically mutual funds, target-date funds, stable value funds, and sometimes individual stocks or bonds. You choose how to invest your contributions based on your age, risk tolerance, and retirement timeline. The money grows through investment returns, and you do not pay taxes on those gains until you withdraw the money.

Most plans offer a default investment option, usually a target-date fund that automatically becomes more conservative as you approach retirement. If you do not make a choice, your contributions go into the default. You can change your investment choices at any time, usually through your plan's website or by contacting the plan administrator.

The investment options and performance vary by plan. Some plans offer more choices and lower fees than others. Ask your plan administrator for a summary of fees and available investments, and review it when you enroll and every few years after.

What happens to your 457(b) if you change jobs

When you leave your job, your 457(b) account stays in place — it does not disappear or get forfeited. You can leave the money there and continue to let it grow, withdraw it, or move it to another account. If you move to another government or nonprofit job that offers a 457(b), you may be able to roll your old account into the new plan. This is called a direct rollover, and it avoids taxes and penalties.

You can also roll a 457(b) into a traditional IRA, though this is less common. Some plans allow it and some do not, so check with your old plan administrator before you leave your job. If you roll into an IRA, you will have access to more investment options, but you will also lose some of the protections that come with a 457(b), such as creditor protection in some states.

If you take a lump-sum distribution instead of rolling over, the entire amount is taxable in that year. Your old employer will withhold taxes from the payment, but you may owe more or less when you file your tax return, depending on your total income for the year.

Employer matching and vesting

Not all 457(b) plans include an employer match or contribution. Some government agencies and nonprofits offer one, and some do not. If your plan does offer a match, it is usually a percentage of your salary — for example, 3 to 5 percent. You have to contribute your own money first to receive the match; your employer will not match money you do not contribute yourself.

Some plans have a vesting schedule, which means you do not own the employer's contribution right away. For example, you might own 20 percent of the employer match after one year, 40 percent after two years, and 100 percent after five years. If you leave before you are fully vested, you forfeit the unvested portion. Check your plan documents to see if your plan has a vesting schedule and how long it is.

Other plans are fully vested when ready, meaning the employer's contribution is yours to keep as soon as it is deposited. This is more common in 457(b) plans than in 401(k) plans, but it varies by employer.

Frequently Asked Questions

Can I withdraw money from my 457(b) before I leave my job?

Most 457(b) plans do not allow withdrawals while you are still employed, with limited exceptions for financial hardship. Some plans have a hardship withdrawal option, but the definition of hardship is strict and set by the IRS. Contact your plan administrator to ask whether your plan allows hardship withdrawals and what documentation you need to provide.

What is the difference between a 457(b) and a 403(b)?

A 403(b) is offered by schools and certain nonprofits, while a 457(b) is offered by government agencies and some nonprofits. Both are tax-deferred retirement plans with similar contribution limits. The main difference is that a 403(b) allows certain withdrawals while you are still employed, whereas a 457(b) generally does not. If your employer offers both, you can contribute to both, but your combined contributions cannot exceed the annual limit.

Do I have to pay taxes on my 457(b) when I retire?

Yes. When you withdraw money from a 457(b), you owe federal income tax on the full amount, just as you would with a 401(k) or traditional IRA. The tax is calculated based on your total income for the year, including the withdrawal. If you withdraw a large amount in one year, you may owe more tax than if you spread withdrawals over several years.

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

Your 457(b) passes to your beneficiary, whom you named when you enrolled in the plan. Your beneficiary can withdraw the money, roll it into their own IRA, or leave it in the plan and take distributions over time. The money is subject to income tax when withdrawn, but it is not subject to estate tax in most cases. Review your beneficiary designation every few years to make sure it reflects your wishes.

Can I borrow from my 457(b)?

Some 457(b) plans allow loans, but many do not. If your plan allows loans, you typically can borrow up to 50 percent of your account balance, up to a maximum amount set by the plan. You repay the loan through payroll deductions, usually over five years. If you leave your job before the loan is repaid, you must repay the remaining balance or it becomes a taxable withdrawal. Ask your plan administrator whether loans are available in your plan.