A Section 457 plan is a tax-deferred retirement savings account for certain government and nonprofit employees
A Section 457 plan is named after the section of the Internal Revenue Code that created it. It lets you set aside money from your paycheck before taxes are taken out, and that money grows without being taxed until you withdraw it in retirement. The account is offered only by state and local government employers, or by certain tax-exempt nonprofit organizations — not by private companies.
The plan works similarly to a 401(k), but with different rules about when you can take the money out and how much you can contribute. If your employer offers one, you decide how much to contribute each year, and your employer deducts that amount from your paycheck and holds it in the plan.
There are two types of Section 457 plans: governmental plans (run by state, county, or city governments) and nongovernmental plans (run by tax-exempt nonprofits). The rules differ between them, especially around early withdrawal and what happens if you leave your job.
Key Takeaways
- Section 457 plans are offered only by government agencies and certain nonprofits, not by private employers.
- You contribute pre-tax money from your paycheck, and the account balance grows tax-deferred until withdrawal.
- Contribution limits for 2024 are $23,500 per year for most participants, with a catch-up option of an additional $7,000 if you are age 50 or older.
- Governmental plans let you withdraw money penalty-free when you separate from service, while nongovernmental plans have stricter early withdrawal rules similar to 401(k)s.
- When you leave your job, your balance stays in the plan or can be rolled over to an IRA or another employer plan, depending on the plan's rules.
Who can open and contribute to a Section 457 plan
You can participate in a Section 457 plan only if your employer offers one. This means you work for a state or local government agency (such as a city, county, school district, or state department) or for a tax-exempt organization recognized by the IRS. Private sector employers do not offer Section 457 plans.
If your employer does offer a plan, you typically enroll during an open enrollment period or when you first become employed. You choose how much to contribute from each paycheck, up to the annual limit set by the IRS. Unlike some retirement plans, there is no income limit that prevents you from participating based on how much you earn.
Some employers require a minimum contribution or have other enrollment rules, so check with your employer's benefits office for their specific requirements.
Annual contribution limits and catch-up contributions
For 2024, you can contribute up to $23,500 per year to a Section 457 plan. This is the same limit as a 401(k), and it applies to the total you contribute across all Section 457 plans if you work for more than one employer.
If you are age 50 or older, you can make an additional catch-up contribution of up to $7,000 per year, bringing your total to $30,500. This catch-up option is available only in the year you turn 50 and in later years.
Some governmental Section 457 plans offer a special catch-up rule: if you are within three years of your plan's normal retirement age, you may be able to contribute double the annual limit (up to $47,000 in 2024) in those final years. Your plan documents will state whether this option is available. These limits change each year based on inflation, so check with your employer or the IRS website for the current year's amounts.
How withdrawals work: governmental versus nongovernmental plans
The biggest difference between the two types of Section 457 plans is when you can withdraw your money without a penalty. In a governmental plan, you can withdraw your balance penalty-free once you separate from service (leave your job), regardless of your age. This is a major advantage over 401(k)s and IRAs, which typically charge a 10 percent early withdrawal penalty if you take money before age 59½.
In a nongovernmental plan, the rules are stricter. You cannot withdraw money before age 59½ without paying a 10 percent penalty, just like a 401(k). The exception is if you have a severe financial hardship, which the plan defines — usually a narrow set of circumstances like medical expenses, home purchase, or preventing eviction. You must request a hardship withdrawal through your plan administrator.
In both types of plans, you must begin taking required minimum distributions (RMDs) once you reach age 73 (as of 2023, under current law). The amount is calculated based on your age and account balance, and you receive it whether or not you need the money.
Tax treatment of contributions and withdrawals
Money you contribute to a Section 457 plan comes out of your paycheck before federal income tax is withheld. This lowers your taxable income for the year you contribute. For example, if you earn $60,000 and contribute $5,000 to your plan, you pay federal income tax only on $55,000.
The money in your account grows tax-free while it sits in the plan. You do not pay tax on investment gains, dividends, or interest earned inside the account.
When you withdraw money in retirement, the full amount is taxed as ordinary income at your tax rate in that year. If you withdraw $30,000 in a year when you are in the 22 percent tax bracket, you owe federal income tax on that $30,000. State and local income taxes may also explore, depending on where you live and work.
What happens to your Section 457 plan when you leave your job
When you separate from service with your employer, you have several options for your Section 457 balance. You can leave the money in your employer's plan if the plan allows it, and continue to let it grow tax-deferred. Many plans do allow this, though some require you to make a decision within a certain timeframe.
You can also roll your balance into an Individual Retirement Account (IRA) or into a retirement plan offered by a new employer, if that plan accepts rollovers. A rollover moves the money directly from one account to another without you touching it, so no taxes are withheld and you avoid any tax consequences.
If you withdraw the money directly instead of rolling it over, the full amount is subject to income tax in that year. If you are under age 59½ and your plan is a nongovernmental plan, you also owe the 10 percent early withdrawal penalty — unless you meet an exception. In a governmental plan, you can withdraw penalty-free at any age after separation from service.
Some plans require you to take your balance as a lump sum within a certain period. Check your plan's rules or contact your benefits office to understand your options.
Section 457 plans compared to 401(k)s and IRAs
| Feature | Section 457 (Governmental) | Section 457 (Nongovernmental) | 401(k) | Traditional IRA |
|---|---|---|---|---|
| Who offers it | State and local government | Tax-exempt nonprofits | Private employers | Individual (any employer) |
| 2024 contribution limit | $23,500 (or $47,000 with special catch-up) | $23,500 | $23,500 | $7,000 |
| Penalty-free withdrawal after separation | Yes, at any age | No (10% penalty before 59½) | No (10% penalty before 59½) | No (10% penalty before 59½) |
| Employer match | Varies by employer | Varies by employer | Common | Not available |
| RMD age | 73 | 73 | 73 | 73 |
The most significant difference is the early withdrawal rule in governmental Section 457 plans. If you work for a government employer and leave your job at age 55, you can withdraw your entire balance without penalty. With a 401(k) or traditional IRA, you would owe a 10 percent penalty on any withdrawal before age 59½. This makes governmental Section 457 plans particularly valuable for public employees who plan to retire before their mid-50s.
Section 457 plans also have higher contribution limits than traditional IRAs ($23,500 versus $7,000 in 2024), which allows you to save more money each year. However, 401(k)s offer the same contribution limit as Section 457 plans, and many 401(k)s include an employer match — a contribution your employer makes on your behalf — while Section 457 plans vary by employer.
Frequently Asked Questions
Can I have both a Section 457 plan and a 401(k) at the same time?
Yes, if you work for two different employers — one offering a Section 457 plan and one offering a 401(k). However, your combined contributions to both plans cannot exceed the annual limit ($23,500 in 2024). If you contribute $15,000 to your Section 457 plan, you can contribute only $8,500 to your 401(k) that year.
What is the difference between a governmental and nongovernmental Section 457 plan?
The main difference is the early withdrawal rule. Governmental plans let you withdraw money penalty-free after you leave your job, at any age. Nongovernmental plans have the same early withdrawal penalties as 401(k)s — 10 percent if you withdraw before age 59½ — with limited exceptions for hardship. Nongovernmental plans are offered by tax-exempt nonprofits, while governmental plans are offered by state and local government agencies.
Do I have to take money out of my Section 457 plan when I retire?
You must begin taking required minimum distributions (RMDs) at age 73, whether or not you have retired. The amount is based on your age and account balance. However, if you are still working and your employer's plan allows it, you may be able to delay RMDs until you actually separate from service.
Can I roll my Section 457 balance into an IRA?
Yes, you can roll a Section 457 balance into a traditional IRA or into a retirement plan offered by a new employer, if that plan accepts rollovers. A direct rollover (money transferred directly between accounts) avoids taxes and penalties. If you withdraw the money yourself, it counts as taxable income and may be subject to the 10 percent early withdrawal penalty if you are under 59½ and have a nongovernmental plan.
What happens to my Section 457 plan if I die before retirement?
Your beneficiary — the person or people you name in your plan documents — receives your account balance. The money is paid out according to the plan's rules, which may allow a lump sum payment or a series of payments over time. Your beneficiary will owe income tax on the withdrawals. Designating a beneficiary is important, so review your plan documents and update it if your circumstances change.