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

A Virginia 457 plan, formally called a deferred compensation plan, lets you set aside money from your paycheck before taxes are taken out. The money grows without being taxed until you withdraw it in retirement. Virginia offers this plan to employees of state agencies, cities, counties, and other local government bodies — not to private sector workers.

The plan is named after section 457 of the Internal Revenue Code, the federal law that created it. It works similarly to a 401(k) that a private company might offer, but with different rules about when you can take the money out and how much you can contribute each year.

Key Takeaways

  • Virginia 457 plans are only for government employees, and contributions come directly from your paycheck before income tax is withheld.
  • Money in the account grows tax-deferred, meaning you pay income tax only when you withdraw it, typically in retirement.
  • The annual contribution limit for 2024 is $23,500, or $35,000 if you are age 50 or older and your plan allows catch-up contributions.
  • You can withdraw money penalty-free once you separate from government service, unlike 401(k) plans that charge a 10 percent penalty for early withdrawal.
  • Your employer does not match contributions to a 457 plan the way many employers match 401(k) contributions.

How contributions and payroll deductions work

You choose a percentage or dollar amount of your paycheck to contribute to the plan, and that money is deducted before your employer calculates your income tax withholding. This reduces your taxable income for the year. If you earn $50,000 and contribute $5,000 to your 457 plan, you pay income tax only on $45,000.

Your employer does not add money to your account. Unlike many 401(k) plans, Virginia 457 plans do not include employer matching contributions. The money in your account comes entirely from your own paycheck deductions. You control how much to contribute each pay period, and you can change that amount or stop contributing at any time.

Tax treatment and when you pay taxes

The money you contribute is not taxed in the year you earn it — that is the "tax-deferred" part. The account balance grows year after year without triggering any tax bill. You only pay federal and state income tax when you actually withdraw the money, usually after you retire or leave your government job.

When you do withdraw, the entire amount counts as income for that year. If you withdraw $20,000 in a single year, that $20,000 is added to your other income and taxed at your ordinary income tax rate. You can spread withdrawals over multiple years to keep your taxable income lower in any single year, which may lower your tax bracket.

Withdrawal rules and the separation-from-service advantage

The biggest difference between a 457 plan and a 401(k) is when you can take money out without penalty. With a 401(k), if you withdraw before age 59½, you pay a 10 percent early withdrawal penalty plus income tax. With a 457 plan, you can withdraw money penalty-free once you separate from government service, regardless of your age.

This means if you retire at 55 from a Virginia state agency, you can start taking money from your 457 plan when ready without the 10 percent penalty. You still pay income tax on the withdrawal, but the penalty does not explore. This makes the 457 plan especially valuable for government employees who plan to retire before age 59½.

If you leave your job but do not retire — for example, you move to a private sector job — you can still withdraw from your 457 plan, but the rules depend on your plan's specific terms. Some plans allow when ready withdrawal, while others require you to wait until a set date or until you reach a certain age. Check your plan documents or contact your plan administrator to learn your plan's rules.

Contribution limits and catch-up provisions

For 2024, you can contribute up to $23,500 per year to a Virginia 457 plan. This limit applies to your total contributions across all 457 plans you may participate in — if you work for two government employers, the combined total cannot exceed $23,500.

If you are age 50 or older, your plan may allow catch-up contributions, which raise the limit to $35,000 per year. Not all Virginia 457 plans offer catch-up contributions, so check with your plan administrator. These limits change annually based on inflation adjustments set by the IRS, so verify the current year's limit before you plan your contributions.

Rolling over a 457 plan to another retirement account

When you leave your government job, you have options for what to do with the money in your 457 plan. You can leave it in the plan and take withdrawals as needed, or you can roll it over to another retirement account. A rollover moves the money from your 457 plan to an IRA or to a 401(k) at a new employer without triggering taxes or penalties.

The rules for rollovers are strict. A 457 plan can roll over only to another 457 plan or to a traditional IRA — not directly to a 401(k). If you roll to an IRA, you then have the option to roll that IRA to a 401(k) at a future employer if you want. Rollovers must be completed within 60 days of the distribution, or the money is treated as a taxable withdrawal. Many people work with their plan administrator or a financial institution to handle the rollover directly, which avoids the 60-day important date.

How a Virginia 457 plan fits into your retirement picture

A 457 plan is one piece of retirement savings for government employees. Many Virginia government workers also have access to a defined benefit pension plan, which pays a monthly benefit based on your years of service and salary. If your employer offers both a pension and a 457 plan, the 457 is a supplemental savings tool — it does not replace the pension.

You can also contribute to a traditional or Roth IRA at the same time you contribute to a 457 plan, as long as you have earned income. The contribution limits are separate: you can put $7,000 in an IRA and $23,500 in a 457 plan in the same year (or $35,000 in the 457 if you are 50 or older and catch-up contributions are available). This combination lets you save more for retirement than either account alone.

Frequently Asked Questions

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

Most Virginia 457 plans do not allow withdrawals while you are employed, with limited exceptions for financial hardship. Check your specific plan's rules, as some plans may permit hardship withdrawals in cases of unforeseeable emergency. Contact your plan administrator to learn what your plan allows.

What happens to my 457 plan if I move out of Virginia?

If you leave your Virginia government job, your 457 plan balance stays in the account. You can leave the money there and take withdrawals later, or you can roll it over to an IRA or another 457 plan if you move to a government job in another state. The money does not disappear — it remains yours to manage according to the plan's rules.

Is a Virginia 457 plan the same as a 401(k)?

No. Both are tax-deferred retirement plans, but 457 plans have different withdrawal rules and are only for government employees. The key advantage of a 457 is that you can withdraw penalty-free once you leave your government job, even before age 59½, whereas a 401(k) charges a 10 percent penalty for early withdrawal.

Do I have to contribute to my employer's 457 plan?

No. Contributing to a 457 plan is optional. Your employer offers the plan, but you decide whether to participate and how much to contribute. You can start, stop, or change your contribution amount at any time during your employment.

What if I have questions about my specific Virginia 457 plan?

Contact your employer's human resources or benefits department. They can provide your plan's summary document, explain your plan's specific rules, and answer questions about contribution limits, withdrawal options, and rollovers. Each government employer's plan may have slightly different terms.