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

A 457 plan (officially a 457(b) deferred compensation plan) lets you set aside money from your paycheck before taxes are taken out, similar to a 401(k). The money grows tax-deferred until you withdraw it in retirement. The employer — your state agency, city, school district, or nonprofit organization — sets up and administers the plan, though you control where your contributions are invested.

Unlike a 401(k), a 457 plan has no early withdrawal penalty if you leave your job or retire. You can withdraw money once you separate from service, regardless of age. This makes 457 plans particularly useful if you plan to retire before 59½, since you avoid the 10% penalty that applies to early 401(k) withdrawals.

The plan is named after Section 457 of the Internal Revenue Code. Only certain employers can offer them: state and local government agencies (including public schools and universities) and some tax-exempt nonprofits. If your employer offers one, you'll see it listed alongside or instead of a 401(k) option during benefits enrollment.

Key Takeaways

  • A 457 plan lets government and nonprofit employees contribute pre-tax income that grows tax-deferred until withdrawal.
  • You can withdraw money without a 10% early withdrawal penalty once you leave your job, even before age 59½.
  • For 2024, you can contribute up to $23,500 per year (or $35,250 if you're age 50 or older), with a catch-up window in your final three years before retirement.
  • Money withdrawn is taxed as ordinary income in the year you take it out, but contributions reduce your taxable income in the year you make them.
  • A 457 plan is separate from Social Security and any pension your employer offers — you manage contributions and investment choices yourself.

Who can open and contribute to a 457 plan

Your employer must offer a 457 plan for you to participate. Government agencies at the state, county, city, and local level can sponsor them, as can public school districts, public universities, and certain tax-exempt organizations (primarily nonprofits with 501(c)(3) status). If your employer doesn't offer one, you cannot open a 457 plan on your own.

Once your employer's plan is available, you can enroll during the open enrollment period or when you first become may be able to access (usually when you're hired). There are no income limits that prevent you from participating, and you don't need to have earned income outside your job — your salary from the employer offering the plan is sufficient.

If you work for a nonprofit that offers a 457 plan, the rules are slightly different from government plans. Nonprofit 457 plans have stricter distribution rules and fewer catch-up options. Ask your benefits administrator whether your nonprofit's plan is a government 457 or a nonprofit 457, since the withdrawal rules differ.

Annual contribution limits and catch-up rules

For 2024, you can contribute up to $23,500 per year to a 457 plan. This limit applies to your combined contributions across all 457 plans if you work for more than one employer. The limit increases each year if the IRS adjusts it for inflation; check your plan documents or your employer's benefits website for the current year's limit.

If you're age 50 or older, you can make an additional catch-up contribution of $7,750 in 2024, bringing your total to $31,250. This catch-up is separate from the regular limit and is available to anyone who reaches age 50 during the calendar year.

A 457 plan also offers a special final three-year catch-up in the last three years before your normal retirement age (as defined by your plan). During these years, you can contribute up to twice the regular annual limit — $47,000 in 2024 — if your plan allows it. You cannot combine this catch-up with the age-50 catch-up in the same year; you use whichever gives you the higher limit. Check with your plan administrator to confirm your plan offers this option and what your normal retirement age is.

Tax treatment of contributions and withdrawals

Money you contribute to a 457 plan reduces your taxable income in the year you contribute it. If you earn $60,000 and contribute $5,000 to your 457 plan, you report only $55,000 as taxable income to the IRS. This lowers your federal income tax bill for that year.

The money in your account grows without being taxed each year. You don't pay tax on investment gains, dividends, or interest while the money sits in the plan. This tax-deferred growth means your balance can compound faster than it would in a regular savings account or taxable investment account.

When you withdraw money, you pay ordinary income tax on the full amount withdrawn in that year. If you withdraw $10,000, you add $10,000 to your taxable income for the year. The tax you owe depends on your total income and your tax bracket. Unlike a traditional IRA or 401(k), there is no 10% early withdrawal penalty if you withdraw before age 59½, as long as you've separated from service with that employer.

If your employer makes matching contributions to your 457 plan, those contributions are also pre-tax and follow the same tax treatment as your own contributions.

How a 457 plan differs from a 401(k)

The most important difference is the early withdrawal rule. With a 401(k), if you withdraw money before age 59½, you pay a 10% penalty on top of ordinary income tax (with limited exceptions). With a 457 plan, there is no 10% penalty if you withdraw after you separate from service, regardless of your age. This makes a 457 plan more flexible if you plan to retire in your 50s or earlier.

A 457 plan also has a special catch-up window in your final three years before retirement that allows you to contribute double the regular limit. A 401(k) does not have this option.

The contribution limits are the same for both plans ($23,500 in 2024, plus $7,750 if you're 50 or older), but they are separate. If you have both a 401(k) and a 457 plan with different employers, you can contribute the full limit to each one in the same year.

A 401(k) is offered by private employers and some nonprofits. A 457 plan is offered only by government agencies and certain nonprofits. If you work for a state agency or school district, you'll typically have access to a 457 plan, not a 401(k).

How a 457 plan differs from a 403(b)

A 403(b) plan is another retirement account available to nonprofit and public school employees. Like a 457 plan, it allows pre-tax contributions and tax-deferred growth. However, the withdrawal rules are different: a 403(b) follows the same early withdrawal penalty rules as a 401(k) — you pay a 10% penalty if you withdraw before age 59½ (with exceptions). A 457 plan does not impose this penalty once you separate from service.

Some employers offer both a 403(b) and a 457 plan. If yours does, you can contribute to both in the same year, and each has its own contribution limit. The choice depends on when you plan to retire and how much flexibility you want with early withdrawals.

A 403(b) is more common in schools and universities. A 457 plan is more common in state and local government agencies. Ask your benefits administrator which plans your employer offers.

When and how you can withdraw money

You can withdraw money from a 457 plan once you separate from service with the employer that sponsors the plan. Separation from service means you've left your job, retired, or are no longer employed by that organization. You do not have to reach any specific age to withdraw — the separation itself triggers your may be able to access.

Some plans allow in-service withdrawals while you're still employed, but this is optional and varies by plan. In-service withdrawals are typically limited to specific circumstances (such as financial hardship or reaching age 59½) and are not available in all plans. Check your plan documents or ask your benefits administrator whether your plan allows in-service withdrawals and under what conditions.

Once you're may be able to access to withdraw, you can take the money as a lump sum, in installments over a set period, or as a series of equal payments over your life expectancy (called an annuity). The plan administrator will explain your distribution options when you become may be able to access.

You must begin taking withdrawals by April 1 of the year after you turn 73 (as of 2023; this age may change). These are called required minimum distributions (RMDs). The amount is calculated based on your age and account balance. If you don't take the required amount, you owe a 25% penalty on the shortfall (reduced to 10% if you correct it within two years).

How to enroll and manage your account

To enroll in a 457 plan, contact your employer's benefits or human resources department during open enrollment or when you first become may be able to access. You'll complete an enrollment form that asks how much of each paycheck you want to contribute. The amount is deducted automatically before taxes are calculated.

After enrollment, you'll receive login credentials to access your account online. Most plans let you view your balance, change your contribution amount, and direct where your money is invested among the plan's available investment options (typically mutual funds, target-date funds, and stable value funds).

You can change your contribution amount at any time, though some plans limit changes to once per year or to open enrollment periods. If you leave your job, contact the plan administrator to discuss your withdrawal options and timeline.

Frequently Asked Questions

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

Yes, if you work for two different employers — one offering a 457 and one offering a 401(k). You can contribute the full limit to each plan in the same year. However, if a single employer offers both plans, the contribution limits are combined, meaning your total contributions to both cannot exceed the annual limit.

What happens to my 457 plan if I change jobs?

Your money stays in the plan until you withdraw it. You can leave it there and continue to manage it, or you can roll it over to an IRA or to a 457 plan offered by your new employer (if your new employer is also a government or nonprofit organization). Speak with the plan administrator about your options before you leave.

Do I have to take required minimum distributions from a 457 plan?

Yes, you must begin taking required minimum distributions by April 1 of the year after you turn 73. The amount is based on your age and account balance. If you don't take the required amount, you owe a penalty. However, if you're still working for the employer that sponsors the plan, some plans allow you to delay RMDs until you actually retire.

Is there a Roth 457 option?

Some 457 plans offer a Roth option, which works like a Roth 401(k). You contribute after-tax money, but withdrawals in retirement are tax-free. Not all plans offer this, so check with your benefits administrator. If available, you can contribute to both a traditional 457 and a Roth 457 in the same year, as long as your combined contributions don't exceed the annual limit.

Can I borrow from my 457 plan?

Some 457 plans allow loans, but it depends on the specific plan. If your plan allows loans, you typically borrow against your own contributions and repay the loan through payroll deductions. Ask your plan administrator whether loans are available and what the terms are.