A 457 plan is a retirement savings account for certain government and nonprofit workers

A 457 plan is a tax-deferred retirement account offered by state and local government employers, and by some nonprofit organizations. You contribute money from your paycheck before taxes are taken out, the money grows without being taxed each year, and you pay income tax only when you withdraw it in retirement. The account is named after the section of the Internal Revenue Code that created it.

The main reason employers offer 457 plans is to help workers save for retirement without paying taxes on the growth year to year. For you, the benefit is that your contributions reduce your taxable income in the year you make them, and your balance can grow larger than it would in a regular savings account because you are not paying taxes on the earnings annually.

457 plans are less common than 401(k) plans, which are offered by private employers. If you work for a city, county, state agency, school district, or certain nonprofits, you may have access to a 457 plan instead of or in addition to other retirement accounts.

Key Takeaways

  • A 457 plan lets you set aside money from your paycheck before income tax is withheld, and the money grows tax-deferred until you withdraw it.
  • Only government employees and workers at certain nonprofits can open a 457 plan; private sector employees cannot.
  • You can contribute up to a set annual limit (which changes each year), and you must begin withdrawing money by age 73 unless you are still working.
  • If you leave your job, you can roll your 457 balance into an IRA or another employer plan, or withdraw it and pay taxes on the full amount.

Who can open a 457 plan

Your employer must offer a 457 plan for you to have one. You cannot open one on your own. The plan must be sponsored by a state or local government agency, or by a tax-exempt nonprofit organization (usually a hospital, university, or charitable group). If you work for the federal government, you have access to the Thrift Savings Plan instead, which works differently.

If you work for a private company, you will not have a 457 plan available. Your employer may offer a 401(k) plan or other retirement account instead. Some nonprofit workers have both a 403(b) plan (for nonprofits) and a 457 plan if their employer offers both.

How much you can contribute each year

The IRS sets an annual contribution limit for 457 plans. For 2024, the limit is $23,500 per year if you are under age 50. If you are age 50 or older, you can contribute an additional $7,500 per year as a "catch-up" contribution, for a total of $31,000. These limits change each year, usually by small amounts.

Your contributions come directly from your paycheck, so the money is taken out before your employer calculates your income tax withholding. This means your taxable income for the year is reduced by the amount you contribute. You decide how much to contribute when you enroll in the plan, and you can change that amount once per year or when your life circumstances change (such as a raise, marriage, or birth of a child).

If you have access to both a 457 plan and a 401(k) or 403(b) plan through the same employer, the contribution limits are separate. You can contribute the maximum to each plan in the same year, though this is uncommon.

How the money grows and when you pay taxes

The money in your 457 account is invested in funds you choose — usually a mix of stock funds, bond funds, and money market funds. You do not pay income tax on the earnings (interest, dividends, or capital gains) each year. Instead, the full balance grows without annual tax drag.

When you withdraw money from the plan, you pay ordinary income tax on the entire amount withdrawn, including both your contributions and all the earnings. If you withdraw before age 59½, you normally pay a 10 percent early withdrawal penalty on top of income tax, unless you meet a narrow exception (such as leaving your job at age 55 or later, or having a severe financial hardship). This is different from a 401(k), where the early withdrawal penalty applies only if you leave your job before age 55.

Required withdrawals and the age 73 rule

Once you reach age 73, you must begin taking withdrawals from your 457 plan, even if you are still working. The IRS calls this a required minimum distribution, or RMD. The amount you must withdraw each year is calculated based on your age and your account balance. If you do not take the required amount, you pay a penalty equal to 25 percent of the shortfall (or 10 percent if you correct it within two years).

If you are still employed at age 73, you may be able to delay RMDs from a 401(k) plan, but 457 plans do not have this exception. You must begin withdrawals regardless of whether you are still working. This is one of the key differences between a 457 and a 401(k).

What happens to your 457 when you leave your job

When you leave your employer, you have several options for your 457 balance. You can leave the money in the plan if your former employer allows it, though you will no longer be able to make new contributions. You can roll the balance into a traditional IRA, which gives you more investment choices and lower fees in many cases. You can also roll it into another employer plan if your new employer offers one and accepts rollovers.

If you do not roll the money over, you can withdraw it directly. You will owe income tax on the full amount withdrawn, but you will not owe the 10 percent early withdrawal penalty that normally applies to early withdrawals from retirement accounts. This is a major advantage of 457 plans: the penalty does not explore when you leave your job, regardless of your age. However, you still owe regular income tax.

If you are considering leaving your job, ask your plan administrator whether your plan allows in-service rollovers (moving money out while you are still employed) or whether you must wait until you separate from employment.

How a 457 plan differs from a 401(k)

Both 457 plans and 401(k) plans are tax-deferred retirement accounts, but they have important differences. A 457 plan is offered only by government and nonprofit employers, while a 401(k) is offered by private companies. The early withdrawal penalty rules are different: a 457 plan has no penalty when you leave your job at any age, while a 401(k) charges a 10 percent penalty if you withdraw before age 59½ (with an exception for age 55 and later). A 457 plan requires withdrawals to begin at age 73 even if you are still working, while a 401(k) allows you to delay if you are still employed.

The contribution limits are the same for both types of plans in 2024, and both offer catch-up contributions for workers age 50 and older. If you have access to both a 457 and a 401(k) through your employer, you can contribute to both in the same year, though the limits are separate.

Frequently Asked Questions

Can I withdraw money from my 457 plan before retirement?

You can withdraw money at any time, but you will owe income tax on the amount withdrawn. If you are under age 59½ and still employed, you will also owe a 10 percent early withdrawal penalty unless you meet a narrow exception (such as a severe financial hardship). If you have already left your job, the penalty does not explore, though you still owe income tax.

What happens to my 457 plan if I die?

Your beneficiary (the person you named when you opened the plan) will inherit the balance. They can roll it into an inherited IRA or withdraw it. The rules for inherited retirement accounts changed in 2023, so ask your plan administrator what options your beneficiary has and what timeline they must follow.

Can I have a 457 plan and a Social Security benefit at the same time?

Yes. Your 457 plan is separate from Social Security. You can receive Social Security benefits and withdraw from your 457 plan at the same time. The withdrawals do not affect your Social Security benefit amount, though they do count as income for tax purposes.

What if my employer stops offering the 457 plan?

If your employer terminates the plan, you will be notified and given options for your balance. You can usually roll the money into an IRA or another employer plan, or withdraw it. Your plan administrator will explain the timeline and your choices.

Is my 457 plan protected if my employer has financial problems?

Yes. Your 457 plan assets are held in trust and are separate from your employer's general funds. If your employer faces bankruptcy or financial difficulty, your 457 balance is protected and cannot be claimed by the employer's creditors.