457 Plan

Key Takeaways

• A 457 plan is a tax-deferred retirement savings account for employees of state and local governments and certain nonprofit organizations.
• Contributions are pre-tax, reducing taxable income and deferring taxes on investment gains until withdrawal.
• The 2025 contribution limit is $23,500. Governmental 457(b) plans offer an additional $7,500 catch-up for those aged 50 and above; non-governmental plans do not provide age-based catch-ups.
• Participants within three years of retirement can use a special catch-up provision to contribute up to $47,000 in 2025.
• Withdrawals after separation from service are not subject to the 10% early-withdrawal penalty.
• Governmental 457(b) plans are held in trust and protected from employer creditors, while non-governmental plans are not.
• Roth 457 options allow after-tax contributions and potential tax-free withdrawals in retirement.
• Required Minimum Distributions (RMDs) begin at age 73 or 75, depending on year of birth.
• Employees with both a 401(k) and a 457(b) can contribute to each plan separately, effectively doubling annual savings.
• Non-governmental 457 plans are typically reserved for executives and have stricter withdrawal and rollover restrictions.

What Is a 457 Plan?

A 457 plan is a deferred compensation plan governed by Section 457 of the Internal Revenue Code. It lets eligible employees set aside a portion of their salary for retirement, allowing their contributions and investment earnings to grow tax-deferred until withdrawn.

These plans are most common among public-sector workers, including city, state, and county employees, and employees of qualifying nonprofit organizations, such as hospitals, universities, and charitable institutions.

There are two main types:

Governmental 457(b): Offered by state and local governments. Assets are held in trust for participants, offering strong legal protection.

Non-Governmental 457(b): Available to employees of tax-exempt organizations. Assets remain employer property until distributed, creating potential creditor risk.

The 457 plan is designed to complement pension systems and other employer retirement programs, helping workers accumulate additional tax-deferred savings.

How a 457 Plan Works

The 457 plan helps eligible public-sector and nonprofit employees build retirement savings through automatic payroll deductions. Contributions lower taxable income, while investment growth compounds tax-deferred until funds are withdrawn. Understanding how the plan functions (its contribution rules, investment options, and withdrawal provisions) provides context for evaluating retirement benefits.

Contributions and Limits

Employees choose how much of their salary to defer, either as a fixed dollar amount or a percentage of pay. These contributions are made pre-tax, reducing current taxable income.

2025 contribution limits:

• Standard limit: $23,500 (both governmental and non-governmental)
• Age 50+ catch-up: Additional $7,500 (governmental plans only)
• Age 60-63 enhanced catch-up: Additional $11,250 (governmental plans only)
• Special three-year catch-up: Allows up to $47,000 per year for participants within three years of retirement who under-contributed previously (both governmental and non-governmental)"

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Employer contributions are permitted, though they are less common than in private-sector 401(k)s.

Investment Options

Most 457(b) plans offer a menu of diversified investment choices that allow participants to tailor their portfolios based on risk tolerance and retirement goals. Common options include:

• Mutual funds (stock, bond, and balanced funds)
• Target-date funds that automatically adjust asset allocation over time
• Index funds tracking major market benchmarks
• Stable-value or fixed-interest accounts

Earnings within the account grow tax-deferred. Participants can adjust allocations periodically, though market fluctuations can affect account value before retirement.

Withdrawals and Access to Funds

Withdrawals from a 457(b) plan are permitted under the following circumstances:

• Separation from service: Once you leave your employer, regardless of age.
• Unforeseeable emergency: As defined by the IRS (e.g., major illness, casualty loss, or similar hardship).
• Required Minimum Distributions (RMDs): Starting at age 73 or 75, depending on your birth year.

Unlike 401(k) or 403(b) plans, 457(b) plans do not impose a 10% early-withdrawal penalty for distributions after separation, even if you are under age 59½. This makes them particularly valuable for individuals planning early retirement or transitioning to part-time work before full retirement age.

Eligibility and Participation

Eligibility for a 457(b) plan depends on the employer's classification:

• Employees of state, county, and municipal governments
• Law enforcement officers, firefighters, and emergency responders
• Public school and university employees
• Workers at qualified nonprofit institutions (for non-governmental 457 plans)

Participants can usually modify contribution levels annually and reallocate investments as needed. Loan provisions vary by plan, with some governmental plans offering limited borrowing options. Participants should review their specific plan documents for loan availability.

Tax Treatment

457(b) contributions are excluded from current taxable income. Taxes are deferred until withdrawal, when distributions are taxed as ordinary income.

Roth 457(b) options (if available) allow after-tax contributions with tax-free qualified withdrawals (after age 59½ and a five-year holding period).

Traditional 457(b) participants must begin taking Required Minimum Distributions (RMDs) at age 73 for individuals born between 1951–1959 and at age 75 for those born in 1960 or later. Starting in 2024, Roth 457(b) accounts in governmental plans are no longer subject to RMDs during the participant's lifetime under SECURE 2.0 provisions, aligning them with Roth IRAs.

The ability to choose between traditional and Roth options provides flexibility for managing taxable income during retirement.

Rollover and Portability Rules

Governmental 457(b) balances can roll into another governmental 457(b), a 401(k), 403(b), or a traditional IRA.

Non-governmental 457(b) balances can only roll into another non-governmental plan with a similar employer structure.

Participants considering rollovers can verify plan compatibility and evaluate whether Roth conversion options or in-plan transfers are available to diversify future tax exposure.

Example: How the 457 Plan Supports Early Retirement

Consider Kevin, a 56-year-old firefighter planning to retire at 58. Because he expects a pension but wants additional flexibility, Kevin contributes the full annual limit of $23,500 to his 457(b) plan, plus catch-up contributions in his final years.

When Kevin retires, he can immediately withdraw funds without paying the 10% penalty that would normally apply to 401(k) distributions. This bridge income supports him until his pension and Social Security benefits begin—demonstrating how the 457(b) plan helps facilitate smooth, penalty-free early retirement.

How 457 Plans Compare to Other Retirement Accounts

The following comparisons highlight key differences between types of 457 plans and other popular retirement savings options discussed in retirement planning.

457(b) vs 457(f)

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457(f) plans are typically designed for nonprofit executives as part of supplemental compensation arrangements. They provide greater flexibility in plan design but carry higher forfeiture and creditor risks compared to standard 457(b) plans.

457(b) vs 401(k) and 403(b)

Public-sector employees with access to both a 457(b) and a 401(k) or 403(b) plan can take advantage of separate contribution limits, potentially deferring over $47,000 annually while maximizing tax-deferred retirement savings.

Pros and Considerations

The following section outlines the primary advantages and limitations commonly discussed in retirement planning for 457 plans.

Advantages

Penalty-Free Withdrawals: Participants can withdraw funds after separating from service without paying the 10% early-withdrawal penalty, even if they are under age 59½.

Separate Contribution Limit: Employees who also have access to a 401(k) or 403(b) can contribute the full limit to each plan, effectively doubling their annual tax-deferred savings potential.

Catch-Up Flexibility: Participants nearing retirement can take advantage of special catch-up provisions, allowing contributions up to twice the standard limit during the final three years before retirement.

Roth Option (Where Available): Some plans offer Roth 457 contributions, which allow after-tax savings and tax-free qualified withdrawals, providing valuable tax diversification in retirement.

Governmental Trust Protection: Assets in governmental 457(b) plans are held in trust and protected from employer creditors, offering strong legal security.

Ideal for Early Retirement: The absence of early-withdrawal penalties makes the 457 plan an effective bridge account for employees retiring before age 59½.

Limitations

Limited Employer Match: Public-sector employers rarely provide matching contributions, unlike private-sector 401(k) plans.

Fewer Investment Options: Most 457(b) plans offer narrower investment menus compared to large corporate 401(k)s, potentially limiting diversification.

Mandatory RMDs for Traditional Balances: Required Minimum Distributions from traditional 457(b) accounts must begin at age 73 or 75, depending on birth year, even if the participant doesn't need the income. Starting in 2024, Roth 457(b) accounts in governmental plans are exempt from lifetime RMDs under SECURE 2.0.

Taxable Withdrawals: All withdrawals from traditional 457(b) balances are taxed as ordinary income in the year received.

Creditor Exposure (Non-Governmental Plans): Assets in non-governmental 457 plans remain employer-owned until paid out, exposing them to potential creditor risk if the employer becomes insolvent.