A 457 plan lets you set aside money from your paycheck before taxes, but only if you work for a government agency or certain nonprofits

A 457 deferred compensation plan is a retirement savings account offered by state and local government employers, the federal government, and some tax-exempt organizations. You contribute money directly from your salary, and those contributions reduce your taxable income for the year. The money grows tax-free until you withdraw it, usually in retirement. The account is held in your name, but your employer controls the investment options available to you.

The key word is "deferred" — you are postponing taxes on this money until later. Unlike a 401(k), a 457 plan is not a may have access to retirement plan under federal tax law, which means the rules around contributions, withdrawals, and what happens if your employer goes through financial trouble are different.

Key Takeaways

  • A 457 plan is only available through government employers or certain nonprofits, not private companies.
  • You contribute pre-tax dollars, which lowers your taxable income in the year you contribute, and the money grows without annual tax.
  • Contribution limits are set by the IRS and change yearly, and they are separate from 401(k) or 403(b) limits if you have those plans too.
  • You can withdraw money without the 10 percent early withdrawal penalty that applies to 401(k)s, but you still owe income tax on the withdrawal.
  • If your employer faces financial hardship, your 457 balance is not protected the way a 401(k) is, because the money is held as a general asset of the employer.

Who can open a 457 plan

You must work for a state or local government employer, or for the federal government, to have access to a 457 plan. Some tax-exempt organizations — typically large nonprofits — also offer them. Your employer decides whether to offer a 457 plan at all; there is no requirement that they do. If your employer offers one, you can usually enroll during an open enrollment period or when you are first hired.

If you work for a private company, you cannot open a 457 plan. Private employers offer 401(k) plans instead. If you work for a nonprofit that is not tax-exempt, you also cannot use a 457 plan.

How much you can contribute each year

The IRS sets an annual contribution limit for 457 plans. 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 in "catch-up" contributions, for a total of $31,000. These limits change yearly and are announced by the IRS in October for the following year.

These contribution limits are separate from any 401(k) or 403(b) limit. If you have both a 457 plan and a 401(k) through different employers, you can contribute the full limit to each plan in the same year. However, if your employer offers both a 457 and a 403(b), the limits may be combined depending on your employer's plan documents — check with your benefits office about how your specific plans interact.

Your employer may also set a lower limit than the IRS allows, so review your plan documents or ask your benefits administrator what the actual cap is for your account.

Tax treatment of contributions and withdrawals

Money you contribute to a 457 plan comes out of your paycheck before federal income tax is calculated, which means your taxable income for the year is reduced by the amount you contribute. If you contribute $10,000 to your 457 plan, you report $10,000 less in income on your tax return. This lowers your federal income tax bill for that year.

The money in your account grows without being taxed each year. You do not pay tax on investment gains, dividends, or interest until you withdraw the money. When you do withdraw, the entire amount you take out — both your original contributions and all the growth — is taxed as ordinary income in the year of withdrawal.

Unlike a 401(k), withdrawals from a 457 plan before age 59½ do not trigger a 10 percent early withdrawal penalty. However, you still owe income tax on the withdrawal. Some 457 plans allow you to withdraw money while still employed, though many restrict withdrawals until you separate from service or reach age 59½.

When you must start taking money out

You must begin withdrawing money from your 457 plan by April 1 of the year after you turn 73. This is called a required minimum distribution, or RMD. The IRS calculates how much you must withdraw based on your age and account balance. If you do not take the required amount, you owe a penalty equal to 25 percent of the shortfall (reduced to 10 percent if you correct it within two years).

However, if you are still working for the employer that sponsors your 457 plan, you may be able to delay RMDs until you actually retire. This is called the "still-working exception." Your plan documents will state whether this option is available. Once you separate from service, RMDs begin the following April 1.

How a 457 plan differs from a 401(k)

A 457 plan and a 401(k) are both employer-sponsored retirement accounts with similar contribution limits, but they have important differences. The biggest difference is legal protection: a 401(k) is a may have access to plan under federal law, which means your balance is protected from your employer's creditors if the company faces bankruptcy or financial trouble. A 457 plan is not a may have access to plan, so your money is technically a general asset of your employer. If your employer has serious financial problems, your 457 balance could be at risk.

The second difference is the early withdrawal penalty. You can withdraw from a 457 plan before age 59½ without the 10 percent penalty that applies to 401(k)s, though you still owe income tax. A 401(k) imposes the penalty unless you meet a narrow exception like disability or a hardship withdrawal.

The third difference is availability: only government and certain nonprofit employers offer 457 plans. Private companies offer 401(k)s. If you change jobs from a government employer to a private company, you cannot roll your 457 balance into a new 401(k) at the private company — you must roll it into an IRA or keep it in the old 457 plan if your former employer allows it.

Investment options and account management

Your employer chooses which investments are available in the 457 plan. Common options include mutual funds, stable value funds, and target-date funds. You select how your contributions are invested among these choices. Your employer may also offer a self-directed brokerage option that lets you invest in a wider range of stocks and bonds.

You can usually change your investment selections during open enrollment or after certain life events like a marriage or birth. Some plans allow you to change investments quarterly or even monthly. Check your plan's rules or contact your benefits administrator to learn when and how often you can rebalance.

Your employer is responsible for keeping the plan running and ensuring it complies with IRS rules. You receive statements showing your balance and investment performance, usually quarterly or annually. Review these statements to track your progress toward your retirement goal.

Frequently Asked Questions

Can I withdraw money from my 457 plan before I retire?

It depends on your plan. Some 457 plans allow in-service withdrawals while you are still employed, while others restrict withdrawals until you separate from service or reach age 59½. Check your plan documents or contact your benefits office to learn what your specific plan allows. Any withdrawal is subject to income tax.

What happens to my 457 plan if I change jobs?

If you leave your government or nonprofit employer, you can leave the money in the old 457 plan if your former employer allows it, or you can roll it into an IRA or another 457 plan at your new employer. You cannot roll a 457 into a 401(k) at a private company. Speak with your new employer's benefits office about rollover options.

Can I have both a 457 plan and a 401(k) at the same time?

Yes, if you work for two different employers — one that offers a 457 and one that offers a 401(k). You can contribute the full IRS limit to each plan in the same year. However, if one employer offers both a 457 and a 403(b), the limits may be combined. Ask your benefits administrator how the limits work for your specific situation.

Do I pay Social Security and Medicare taxes on 457 contributions?

Yes. While 457 contributions reduce your federal income tax, they do not reduce Social Security or Medicare taxes (FICA). You pay FICA on your full salary, including the amount you contribute to the 457 plan.

What if my employer goes bankrupt?

Unlike a 401(k), a 457 plan is not legally protected from your employer's creditors because it is not a may have access to retirement plan. In theory, your balance could be at risk if your employer faces serious financial trouble. In practice, this is rare for government employers, but it is a structural difference you should understand.