A 457 plan is a tax-deferred retirement savings account for state and local government employees and certain nonprofit workers

A 457 plan is an employer-sponsored retirement account that lets you set aside money from your paycheck before taxes are taken out. The money grows tax-free until you withdraw it. Unlike a 401(k), a 457 plan is available only to employees of state and local governments, the District of Columbia, and certain tax-exempt organizations — not private companies.

The account is named after the section of the Internal Revenue Code that created it. There are two types: a 457(b) plan, which is the most common, and a 457(f) plan, which is rarer and has different rules. This guide focuses on 457(b) plans, which is what most government employees encounter.

Money you contribute reduces your taxable income for the year you contribute. When you withdraw the money in retirement, you pay income tax on the full amount — both your contributions and the earnings. You do not pay Social Security or Medicare taxes on 457 contributions, which is different from how some other retirement accounts work.

Key Takeaways

  • A 457(b) plan is only available through state and local government employers or certain nonprofit organizations, not through private employers.
  • You can contribute up to $23,500 per year in 2024, or $35,250 if you are age 50 or older and your employer offers catch-up contributions.
  • Money you contribute comes out of your paycheck before income tax is calculated, lowering your taxable income for that year.
  • You can withdraw money from a 457 plan without the 10 percent early withdrawal penalty that applies to 401(k)s and IRAs, but you still owe income tax on the withdrawal.
  • If you leave your job, you must begin withdrawals within a specific timeframe or face penalties, unlike 401(k)s where you can often leave money in place.

How contributions work and what you can set aside each year

You choose how much to contribute to your 457 plan, and your employer deducts that amount from your paycheck before calculating your income tax. For 2024, the annual contribution limit is $23,500. If you are age 50 or older and your employer's plan includes a catch-up provision, you can contribute an additional $7,750 in the same year, for a total of $31,250.

Some employers offer an additional catch-up option in the final three years before you reach your plan's normal retirement age. This allows you to contribute up to twice the standard limit in those years, but only if you have not used the age-50 catch-up in previous years. The exact rules depend on your employer's plan document, so check with your benefits office about whether this option is available to you.

Your employer may also contribute to your 457 plan on your behalf. Any employer contributions count toward the same annual limit as your own contributions. For example, if your employer contributes $5,000 and you contribute $18,500, you have reached the $23,500 limit for that year.

Tax treatment: when you pay taxes and how much

The money you contribute to a 457 plan is pre-tax, meaning it is deducted from your paycheck before federal income tax is calculated. This lowers your taxable income for the year. If you contribute $10,000 to your 457 plan, your taxable income is $10,000 less than your gross salary.

The earnings inside your 457 account — the interest, dividends, or investment gains — are not taxed while the money remains in the account. You pay no tax on those earnings until you withdraw the money.

When you withdraw money from your 457 plan, the entire withdrawal is taxed as ordinary income. This includes both the money you contributed and all the earnings. If you withdraw $50,000 and $15,000 of that is earnings, you pay income tax on the full $50,000. You do not pay Social Security or Medicare taxes on 457 withdrawals, even while you are still working.

Withdrawal rules and the requirement to begin taking money

You can withdraw money from a 457 plan without the 10 percent early withdrawal penalty that applies to 401(k)s and traditional IRAs. This means you can take money out at any age without penalty — you straightforward owe income tax on the withdrawal. This is one of the largest differences between a 457 plan and other retirement accounts.

However, you cannot withdraw money whenever you want. Your plan document specifies when withdrawals are allowed. Most plans allow withdrawals only when you separate from service — meaning you leave your job — or when you reach age 59½. Some plans allow withdrawals for unforeseeable emergencies, but the definition of emergency is strict and varies by plan.

Once you leave your job, you must begin withdrawals within a specific timeframe. The rules are complex and depend on whether you are a government employee or a nonprofit employee. Generally, government employees must begin withdrawals by April 1 of the year after they turn 73, or by April 1 of the year after they separate from service, whichever is later. Nonprofit employees have different rules. If you do not withdraw the required amount, you owe a 25 percent penalty on the shortfall.

How a 457 plan differs from a 401(k) and an IRA

A 457 plan and a 401(k) are both employer-sponsored accounts with similar contribution limits, but they have key differences. The most important: if you leave your job, you must withdraw money from a 457 plan within a set timeframe, but you can often leave a 401(k) in place with your former employer. Additionally, a 457 plan has no early withdrawal penalty, while a 401(k) charges 10 percent if you withdraw before age 59½.

A 457 plan is also separate from a 401(k). If your employer offers both — which some government agencies do — you can contribute to each account up to its own limit. For example, you could contribute $23,500 to a 457 plan and $23,500 to a 401(k) in the same year, for a combined total of $47,000.

An IRA (Individual Retirement Account) is not employer-sponsored; you open it on your own. The 2024 contribution limit for an IRA is $7,000, or $8,000 if you are age 50 or older. You can have an IRA and a 457 plan at the same time, and contributions to each count toward their own separate limits. IRAs have different withdrawal rules and tax treatment than 457 plans.

What happens to your 457 plan if you change jobs

If you leave your government or nonprofit job, you cannot straightforward leave your 457 plan untouched the way you might with a 401(k). You must take action within a specific window. The exact timeline depends on whether your employer is a government agency or a nonprofit organization, and your plan document will specify the details.

You have a few options. You can withdraw the money in a lump sum and pay income tax on it. You can roll the money into an IRA, which preserves the tax-deferred status. You can also roll it into a 457 plan with a new government or nonprofit employer if you move to a different job in the public sector. Rolling over to an IRA or another 457 plan avoids when ready taxation and allows the money to continue growing tax-free.

If you do not take action by the important date, the plan administrator may force a distribution — meaning they send you the money whether you want it or not. You will owe income tax on the full amount, and if you do not have the cash to cover the taxes, you may face a tax bill you cannot pay.

Investment options and how your money grows

Your 457 plan offers a menu of investment choices, typically mutual funds, index funds, stable value funds, and sometimes company stock. Your employer selects which investments are available in the plan. You choose how to allocate your contributions among these options, and you can usually change your allocation several times per year.

The money you contribute grows based on the performance of the investments you choose. If you select a stock fund and the market rises, your account grows. If the market falls, your account value may decline. A stable value fund typically offers a may provide return, usually a few percentage points per year, with no market risk.

You are responsible for choosing investments that match your risk tolerance and retirement timeline. Your employer may offer educational resources or access to a financial advisor, but the choice is yours. Some plans offer target-date funds, which automatically adjust from stocks to bonds as you approach retirement.

Frequently Asked Questions

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

Yes, if your employer offers both. Each account has its own contribution limit, so you can contribute the maximum to each in the same year. However, most employers offer one or the other, not both. Check with your benefits office about what is available to you.

What happens if I withdraw money from my 457 plan before I retire?

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 full amount. Your plan document specifies when withdrawals are allowed — typically only at separation from service, age 59½, or for unforeseeable emergencies. Withdrawing early reduces the amount available for retirement.

Can I roll my 457 plan into an IRA?

Yes, you can roll a 457 plan into a traditional IRA, which preserves the tax-deferred status and avoids when ready taxation. You must complete the rollover within a specific timeframe after leaving your job. The exact important date depends on your plan and whether you are a government or nonprofit employee. Contact your plan administrator for the important date that applies to you.

Do I have to start withdrawing from my 457 plan at a certain age?

You must begin withdrawals by April 1 of the year after you turn 73, or by April 1 of the year after you separate from service, whichever is later — but only if you are a government employee. Nonprofit employees have different rules. If you do not withdraw the required amount each year, you owe a 25 percent penalty on the shortfall.

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

A 457(b) plan is the standard plan for government and nonprofit employees. A 457(f) plan is used for highly compensated employees at certain organizations and has different contribution limits and vesting rules. Most government employees have access only to a 457(b) plan. Your employer will tell you which type you have.