A 457 plan is a retirement savings account that lets certain government and nonprofit employees set aside money before taxes are taken out
A 457 deferred compensation plan is an employer-sponsored retirement account available to workers at state and local government agencies, and at some tax-exempt organizations like hospitals and universities. The name comes from the section of the tax code that created it: Section 457 of the Internal Revenue Code.
The core idea is straightforward: you contribute money from your paycheck before income tax is calculated, which lowers your taxable income for that year. The money grows tax-free inside the account until you withdraw it, usually after you retire. You do not pay income tax on the contributions or the growth until you take the money out.
A 457 plan is different from a 401(k), which is what most private-sector workers use. The rules are stricter in some ways and looser in others, and the withdrawal penalties are different. If you work for a government agency or certain nonprofits, your employer may offer a 457 plan instead of, or alongside, other retirement accounts.
Key Takeaways
- A 457 plan lets you contribute pre-tax money from your paycheck, reducing your taxable income in the year you contribute.
- The money grows tax-free inside the account, and you pay income tax only when you withdraw it in retirement.
- Contribution limits are set by the IRS each year and are the same as 401(k) limits, though the rules for catching up are different.
- You can withdraw money penalty-free once you separate from your employer, regardless of your age — unlike a 401(k), which usually charges a 10 percent penalty before age 59½.
- If your employer goes out of business or the plan is terminated, your money remains yours and must be rolled over or distributed according to plan rules.
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 organization (usually a 501(c)(3) nonprofit). If you work for a city, county, state, school district, hospital, or university, your employer may offer one.
The two main types are governmental 457 plans (offered by government employers) and nongovernmental 457 plans (offered by nonprofits). The rules differ slightly between them. Governmental plans are more common and have more favorable withdrawal rules.
If your employer does not offer a 457 plan, you cannot participate in one. Some employers offer both a 457 and a 403(b) (another retirement plan for nonprofits and schools), and you may be able to contribute to both in the same year, though the combined limits explore across both accounts.
How much you can contribute each year
The IRS sets an annual contribution limit for 457 plans. For 2024, the limit is $23,500 if you are under age 50. This limit changes most years, so check your plan documents or your employer's benefits office for the current year.
If you are age 50 or older, you can make an additional catch-up contribution of $7,500 in the same year, bringing your total to $31,000. This is called the age-50 catch-up.
Governmental 457 plans have a special rule: in the three years before you reach your plan's normal retirement age, you can contribute up to twice the annual limit (if your plan allows it). This is called the final-three-years catch-up, and it is separate from the age-50 catch-up. Nongovernmental plans do not have this option.
Your contributions come directly from your paycheck, so your employer deducts them before calculating your federal income tax. This reduces your taxable income for the year.
How the money grows and when you pay taxes
Once your money is in the 457 account, it is invested according to the options your plan offers — usually mutual funds, stable value funds, or target-date funds. You do not pay income tax on the contributions or on any investment gains while the money sits in the account.
When you withdraw the money, you pay ordinary income tax on the full amount withdrawn — both your contributions and all the growth. If you withdraw $100,000 and you are in the 22 percent tax bracket, you will owe $22,000 in federal income tax on that withdrawal (plus any state or local income tax, depending on where you live).
The tax is not withheld automatically unless you request it. Many people ask their plan to withhold taxes when they take distributions, so they do not face a large tax bill later.
Withdrawals and the separation-from-service rule
The biggest advantage of a governmental 457 plan is that you can withdraw your money penalty-free once you separate from your employer, no matter how old you are. If you retire at 45, you can take the money out without the 10 percent early-withdrawal penalty that would explore to a 401(k).
This is called the separation-from-service rule. You must have actually left your job — you cannot just take a leave of absence. Once you separate, you can withdraw as much or as little as you want, whenever you want, and pay only ordinary income tax.
Nongovernmental 457 plans have stricter rules. You generally cannot withdraw money until you reach age 59½, have a severe financial hardship, or separate from your employer. Even after separation, some nongovernmental plans require you to take distributions over your lifetime rather than all at once.
If you are still working and have not separated, you can usually take a withdrawal only for an "unforeseeable emergency" — a term the IRS defines narrowly. Most plans require you to prove the emergency and exhaust other resources before approving the withdrawal.
What happens if your employer terminates the plan
If your employer closes or terminates the 457 plan, your money does not disappear. The plan must distribute all account balances to participants, usually within a set timeframe. You will receive the full balance of your account, and you will owe income tax on it when you receive it.
You may have the option to roll the money into another 457 plan (if you move to a different government employer), into a traditional IRA, or into a 401(k) at a new employer. A rollover lets you move the money without paying tax when ready — you only pay tax when you eventually withdraw it.
If you do not roll the money over and straightforward receive it as a distribution, you must pay income tax on the full amount in that year. Your plan administrator should explain your options before the termination happens.
How a 457 plan differs from a 401(k) and 403(b)
A 457 plan is often confused with a 401(k) or 403(b) because they all work on the same basic principle: pre-tax contributions, tax-free growth, and taxes owed on withdrawal. But the differences matter.
| Feature | 457 Plan | 401(k) | 403(b) |
|---|---|---|---|
| Who offers it | Government agencies, nonprofits | Private employers | Schools, nonprofits, hospitals |
| Penalty-free withdrawal after separation | Yes (governmental plans) | No (10% penalty before 59½) | No (10% penalty before 59½) |
| Final-three-years catch-up | Yes (governmental plans) | No | No |
| Contribution limit (2024, under 50) | $23,500 | $23,500 | $23,500 |
| Employer match | Varies by plan | Common | Rare |
The most important difference: if you leave a governmental 457 plan, you can access your money when ready without penalty. With a 401(k) or 403(b), you are stuck paying a 10 percent penalty plus income tax if you withdraw before age 59½, even after you leave your job.
Frequently Asked Questions
Can I have both a 457 plan and a 401(k) at the same time?
If you work for a government agency, you probably cannot — most government employers offer one or the other. If you work for a nonprofit that offers both a 457 and a 403(b), you can contribute to both, but your combined contributions cannot exceed the annual limit ($23,500 in 2024). Some nonprofits allow you to contribute the full limit to each account, so check your plan documents.
What happens to my 457 if I die before I retire?
Your beneficiary — usually your spouse or children, depending on what you named in your plan documents — will receive the account balance. They will owe income tax on it when they receive it, but they can roll it into an inherited IRA to spread the tax over time. The plan administrator will contact your beneficiary after your death.
Can I borrow from my 457 plan?
Some governmental 457 plans allow loans, but many do not. Nongovernmental plans rarely allow them. If your plan does allow loans, you typically borrow against your own balance and repay it through payroll deductions. Check your plan documents or ask your employer's benefits office whether loans are available.
What if I move to a different government employer?
You can roll your 457 balance into the new employer's 457 plan if they have one. This keeps the money in a 457 and preserves the separation-from-service withdrawal rule. If the new employer does not offer a 457, you can roll it into a traditional IRA or, in some cases, into a 401(k) at the new job.
Do I have to start withdrawing at a certain age?
Yes. Once you reach age 73, you must begin taking required minimum distributions (RMDs) from your 457 plan, even if you are still working. The amount is calculated based on your age and account balance. If you do not take the required amount, you owe a 25 percent penalty on the shortfall (or 10 percent if you correct it within two years). Talk to your plan administrator about when your RMDs begin.