A 457 plan lets you set aside money from your paycheck before taxes, and you don't pay taxes on that money until you withdraw it in retirement

A 457 deferred compensation plan is a retirement savings account offered by state and local government employers, and some non-profit organizations. You contribute a portion of your salary to the plan, and that money grows tax-free until you take it out. The key difference from a 401(k) is that 457 plans are designed specifically for government and non-profit workers, and they have different rules about when you can withdraw your money.

The money you contribute reduces your taxable income for the year you contribute it. If you earn $60,000 and put $5,000 into your 457 plan, you only pay income tax on $55,000. Your employer may also contribute to your account, though this varies by plan. The money sits in the account and grows through investments you choose, and you don't owe taxes on the growth until you withdraw it.

Key Takeaways

  • You contribute pre-tax money from your paycheck, which lowers your taxable income for that year.
  • Your employer may match a portion of your contributions, though the amount depends on your specific plan.
  • You can withdraw money penalty-free once you leave your job or reach age 59½, unlike 401(k) plans that charge a 10% penalty for early withdrawal.
  • The annual contribution limit is the same as a 401(k), though the exact amount changes each year based on IRS rules.
  • If you leave your job, you can roll the money into an IRA or another employer's plan to keep it growing tax-free.

How much you can contribute each year

The IRS sets an annual limit on how much you can put into a 457 plan. This limit changes most years. For 2024, the limit is $23,500 if you are under age 50. If you are 50 or older, you can contribute an additional $7,500 as a "catch-up" contribution, bringing your total to $31,000. Check with your plan administrator or the IRS website to confirm the current year's limit, since it may have changed.

Your employer may also contribute to your account on your behalf. Some government employers match a percentage of what you contribute — for example, they might add 50 cents for every dollar you put in, up to a certain percentage of your salary. Others do not match at all. Your plan documents or HR department can tell you whether your employer offers a match and how much it is.

When you can take your money out

One of the biggest advantages of a 457 plan is that you can withdraw money without a penalty once you leave your job, even if you are younger than 59½. With a 401(k), you normally pay a 10% penalty if you withdraw before age 59½. A 457 plan does not have this penalty — you just owe income tax on the money you take out.

You can also withdraw money at age 59½ while still working, or you can wait until you retire. Some plans allow you to take a loan against your balance, though not all do. If your plan allows loans, you typically have to repay the loan within five years, or it becomes a taxable withdrawal. Check your plan documents to see what withdrawal and loan options are available to you.

What happens to your money if you leave your job

When you leave your government or non-profit job, you have choices about what to do with the money in your 457 plan. You can leave it in the plan if your balance is above a certain amount (usually $5,000), and it will continue to grow tax-free. You can also roll it into an Individual Retirement Account (IRA) or into a 457 plan at a new employer if you move to another government job.

Rolling the money into an IRA or another plan keeps it growing tax-free and gives you more investment options. If you straightforward withdraw the money instead of rolling it over, you will owe income tax on the entire amount in that year, which can push you into a higher tax bracket. For this reason, a rollover is usually the better choice if you have a large balance.

How investment choices work in a 457 plan

Your employer's 457 plan offers a menu of investment options — typically mutual funds, target-date funds, stable value funds, and sometimes individual stocks or bonds. You choose how to divide your contributions among these options. A target-date fund automatically shifts from stocks to bonds as you get closer to retirement, which can be a straightforward choice if you don't want to manage your investments yourself.

You can usually change your investment choices once or twice a year, or sometimes more often. The performance of your investments affects how much money you have at retirement. If you are unsure which investments to choose, your plan may offer educational materials or a financial advisor you can speak with. Remember that past performance does not may provide future results, and all investments carry some risk.

Taxes when you retire and start withdrawals

When you withdraw money from your 457 plan in retirement, you pay ordinary income tax on the amount you withdraw. If you withdraw $30,000 in a year, that $30,000 is added to your other income for tax purposes. This can affect how much you owe in federal and state taxes, and it may also affect whether you have to pay taxes on your Social Security benefits.

You are not required to take withdrawals at any specific age, unlike traditional IRAs and 401(k) plans, which require you to start taking money out at age 73. This gives you more flexibility to manage your tax situation in retirement. You can take small withdrawals some years and larger ones in others, depending on your needs and your tax situation.

How a 457 plan differs from a 401(k)

Both plans let you save money before taxes and grow it tax-free, but they have important differences. A 457 plan has no 10% penalty for withdrawal before age 59½ if you leave your job — you just owe income tax. A 401(k) charges a 10% penalty plus income tax if you withdraw before 59½, with limited exceptions. This makes 457 plans more flexible if you plan to retire before age 59½.

The contribution limits are the same for both plans in most years. However, if you work two jobs — one with a 401(k) and one with a 457 plan — you can contribute the full limit to each plan in the same year. With two 401(k) plans, your contributions to both plans count toward a single annual limit. Also, 457 plans are only offered by government and non-profit employers, while 401(k) plans are offered by private companies.

Frequently Asked Questions

Can I withdraw money from my 457 plan before I leave my job?

Most 457 plans allow you to withdraw money at age 59½ while still employed, though some plans are more restrictive. A few plans only allow withdrawals after you leave your job or reach age 70½. Check your plan documents or contact your HR department to learn what your specific plan allows. Some plans also permit loans against your balance.

What happens if I don't roll over my 457 when I change jobs?

If you withdraw the money instead of rolling it over, you will owe income tax on the entire balance in that year. This can result in a large tax bill and may push you into a higher tax bracket. Rolling over to an IRA or another employer's plan avoids this when ready tax hit and lets your money continue growing tax-free.

Do I have to pay taxes on my 457 contributions?

No. Your contributions reduce your taxable income for the year you make them. You only pay taxes when you withdraw the money in retirement. The growth on your investments is also tax-free while the money is in the plan.

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

Yes. If you have a 457 plan through a government job and a 401(k) through another job, you can contribute the full annual limit to each plan separately. This is different from having two 401(k) plans, where your contributions to both count toward a single limit.

What if my employer doesn't offer a 457 plan?

If you work for a government or non-profit employer that does not offer a 457 plan, you may be able to open a SEP IRA or Solo 401(k) if you have self-employment income. If you only have W-2 income from your employer, a traditional or Roth IRA is another option for retirement savings.