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

A 457 plan is a retirement savings account offered by state and local government employers, and by some tax-exempt nonprofits. It works similarly to a 401(k) — you contribute money from your paycheck before taxes are taken out, the money grows without being taxed each year, and you pay income tax on withdrawals in retirement. The main difference is who can use it: only government workers and employees of certain nonprofits are may be able to access, not private-sector employees.

The account is named after the section of the tax code that created it. Your employer sets up the plan and chooses which investment options you can select — typically mutual funds, stable value funds, or target-date funds. You decide how much to contribute each paycheck, up to an annual limit set by the IRS.

Key Takeaways

  • A 457 plan is only available through government employers or certain tax-exempt nonprofits, not private companies.
  • You contribute pre-tax money from your paycheck, and the account grows tax-deferred until you withdraw in retirement.
  • The IRS sets an annual contribution limit that changes each year, and you can contribute more if you are within three years of your plan's normal retirement age.
  • You can withdraw money without the 10% early withdrawal penalty that applies to 401(k)s, as long as you separate from your employer.
  • If you leave your job, you can roll your 457 balance into an IRA or another employer plan, or leave it where it is.

How contributions and tax treatment work

Money you put into a 457 plan comes out of your paycheck before federal income tax is calculated. This reduces your taxable income for the year. For example, if you earn $50,000 and contribute $10,000 to your 457 plan, you only pay federal income tax on $40,000. Your employer does not contribute to the account on your behalf — it is entirely your choice how much to save.

The money you contribute and any investment gains grow without being taxed each year. You do not receive a 1099 form or pay tax on the growth until you actually withdraw the money. When you retire and start taking distributions, those withdrawals are taxed as ordinary income at whatever tax rate applies to you at that time.

Annual contribution limits and catch-up rules

The IRS sets a maximum amount you can contribute to a 457 plan each year. This limit changes annually and is the same for 457 plans as it is for 401(k)s. In recent years the limit has been in the range of $22,000 to $23,000, but you should check with your plan administrator for the current year's figure.

If you are within three years of your plan's normal retirement age, you may be able to contribute an additional amount called a catch-up contribution. This allows you to save more in the years just before you retire. Some plans also allow a special catch-up in your final year of employment. Ask your HR department or plan administrator whether your plan offers these options and what the limits are.

When you can withdraw money without penalties

Unlike a 401(k), a 457 plan does not impose a 10% early withdrawal penalty if you take money out before age 59½. However, you still owe income tax on the withdrawal. The key requirement is that you must have separated from your employer — you cannot straightforward withdraw from an active 457 plan whenever you want.

Once you leave your job, you can withdraw your balance at any time without the early withdrawal penalty. You will owe federal income tax on the amount withdrawn, and possibly state and local taxes depending on where you live and work. Some plans allow you to take distributions in a lump sum, while others require you to spread withdrawals over a period of time or take monthly payments.

What happens to your 457 when you change jobs

If you leave your government or nonprofit job, you have several options for your 457 balance. You can leave the money in the plan if your former employer allows it — many do, and your account will continue to grow tax-deferred. You can also roll the balance into an IRA (individual retirement account), which gives you more investment choices and may have lower fees. Some people roll their 457 into a new employer's 401(k) or 403(b) plan if they move to a different job.

If you roll your 457 into a traditional IRA, the money remains tax-deferred and you do not owe tax on the rollover itself. However, once the money is in an IRA, the early withdrawal penalty rules change — you would owe a 10% penalty if you withdraw before age 59½, with limited exceptions. Before rolling over, understand the differences between keeping the money in your 457 and moving it to an IRA.

Differences between a 457 and a 401(k)

Both plans allow you to save money before taxes and grow it tax-deferred, but they have important differences. A 457 is only for government and nonprofit workers, while a 401(k) is for private-sector employees. A 457 does not impose an early withdrawal penalty when you leave your job, but a 401(k) does — this is a significant advantage if you retire before age 59½.

The contribution limits are the same, and both plans have catch-up options for older workers. However, the investment options available to you depend on what your specific employer offers. A 457 plan is typically simpler than a 401(k) because it has fewer rules, but it also may have fewer investment choices depending on your employer.

How to enroll and manage your account

When you start a job with a government agency or may be able to access nonprofit, your HR or benefits department will provide information about the 457 plan. You will complete an enrollment form that asks how much you want to contribute each paycheck and which investment options you want to choose. You can usually change your contribution amount or investment selections once or twice per year, or when you have a major life change like marriage or the birth of a child.

Most plans provide an online portal where you can view your balance, see how your investments are performing, and update your information. You can also contact your plan administrator with questions about your account. Keep track of your statements and review your balance periodically to make sure your investments are on track for your retirement goals.

Frequently Asked Questions

Can I withdraw from my 457 plan while I am still working?

No, not in most cases. You cannot withdraw from an active 457 plan straightforward because you want to — you must have separated from your employer. Once you leave the job, you can withdraw without the early withdrawal penalty, but while employed, the money stays locked in the account.

What happens to my 457 if I die before retirement?

Your beneficiary — the person you named when you enrolled — will inherit the balance. They can roll it into an IRA in their own name, take it as a lump sum, or spread withdrawals over time, depending on the plan's rules. The money is not taxed when it passes to your beneficiary, but they will owe income tax when they withdraw it.

Can I have both a 457 and a 401(k)?

Yes, if you work two jobs — one with a government employer and one with a private company. However, the annual contribution limits explore across both plans combined. If you contribute $15,000 to your 457, you can only contribute the remaining amount to your 401(k) that year.

Is my 457 protected if my employer goes bankrupt?

Yes. A 457 plan is held in trust and kept separate from your employer's assets. Even if your government agency or nonprofit faces financial trouble, your 457 balance belongs to you and cannot be seized to pay the employer's debts.

What if I need money before I retire?

If you leave your job, you can withdraw from your 457 without the 10% early withdrawal penalty, though you will owe income tax. If you are still employed, you may be able to take a loan from your 457 plan in some cases, but this depends on whether your specific plan allows loans. Ask your plan administrator what options are available.