A 457(b) plan is a tax-advantaged retirement plan for government workers and employees of tax-exempt organizations.
This article looks at IRS guidelines to evaluate how these plans work and what makes them distinct from other retirement savings plans.
Continue reading to see if it’s a good option for you.
What is a 457(b) plan?
A 457(b) plan is a retirement savings plan for employees of state and local governments and some tax-exempt organizations.
It uses pre-tax dollars, giving contributors the chance to lower their taxable income while growing their retirement savings in a tax-deferred account.
How do 457(b) plans work?
Similar to a 401(k), a 457(b) gives public sector and non-profit employees the chance to save for retirement.
Contributions can be made through an elected deduction from your salary.
There are two types of 457(b) plans employees can contribute to:
- Governmental 457(b): This is sponsored by an employer in the public sector and can be rolled over into other types of retirement accounts like a 401(k) or IRA.
- Non-governmental 457(b): This is sponsored by a tax-exempt employer and cannot and is owned by the employer. You cannot roll this type of account into another retirement plan and there may be restrictions on what types of assets you can invest in.
Depending on the employer, you may be offered the option to invest in either a traditional or a Roth 457(b) plan.
A traditional plan uses pre-tax contributions and withdrawals are taxed in retirement.
A Roth plan uses after-tax dollars and qualified withdrawals made during retirement are tax-free.
While employers can contribute to a 457(b) plan it isn’t common. Any contribution an employer makes goes towards the contribution limit, reducing how much an individual employee can save.
Employers administer their plans individually. Depending on who administers the plan and the type of investment options available, fees for 457(b) plans can be higher than other retirement savings plans.
457(b) Contribution Limits
457(b) plans can offer more flexibility when saving for retirement, but come with contribution limits that restrict how much you can save.
457(b) 2024 Contribution Limits
| Contribution Type | Contribution Limit |
|---|---|
| Workers under 50 | $23,000 |
| Workers over 50 | $7,500 |
| Employees three years from retirement | $46,000 |
| Bonus contribution for employees aged 60 to 63 | $11,250 or 150% of catch-up contribution |
In 2024, the annual contribution limit is $23,000 for workers under 50. Employees can contribute 100% of their salary up to the annual contribution limit.
Workers aged 50 or older can contribute up to $7,500 as a catch-up contribution in a governmental plan (but not in a non-governmental plan).
457(b) plans come with special provisions that make it possible to save more right before retirement.
Employees who are three years away from their plan’s typical retirement age can contribute double the annual limit or $46,000.
If an employee isn’t already taking advantage of the catch-up contribution, they can save the annual limit and any unused portions from previous years, whichever is less.
Employees on a government plan can’t take advantage of both catch-up contributions.
In 2025, a new retirement rule will apply to governmental 457(b) plans allowing employees aged 60 to 63 to contribute an additional $11,250 or 150% of their regular catch-up contribution, whichever is greater.
Some employers may offer both a 457(b) plan and a 403(b) plan. If that’s the case, you can contribute the annual limit to both or $46,000.
Unlike a 401(k) plan, employer contributions aren’t separate. If there is an employer contribution, it will be included as part of your contribution limit.
Withdrawal Rules
While 457(b) plans have similar rules to 401(k)s they have different withdrawal rules that can offer employees more flexibility.
Under a 457(b) plan, employees can:
- Withdraw funds from the plan penalty-free if they are no longer employed by the plan’s sponsor or if their employer stops offering a plan
- Retire early without being subject to 10% penalty
- Take a withdrawal due to a qualified unforeseen emergency including: federally declared disasters, domestic abuses, emergency expenses up to $1,000, and long-term care premiums.
Required minimum distributions are required beginning at age 73. They are calculated using the IRS’ Uniform Lifetime Table and must be taken annually.
If you are still working for the plan’s sponsor at age 73 you won’t be required to take a minimum distribution.
Advantages & Disadvantages
A 457(b) comes with several advantages but there are limitations to these types of plans that you’ll want to be mindful of.
Advantages
- Tax benefits: Contributions can reduce your taxable income while savings grow tax-deferred.
- Penalty-free distributions: If you leave your job or retire early you can take an early distribution without incurring a penalty.
- Emergency funding: Under a qualified emergency, you can access your savings to offset some of your expenses.
- Higher catch-up contributions: As you approach retirement age, you can increase the amount of money you can save for retirement.
Disadvantages
- Employer contribution: Employer contributions with 457(b) plans are rare and if you get one, it will reduce your individual contribution limit.
- Limited investing options: You may be limited to investing in a handful of mutual funds or annuities while your contributions may be subject to a vesting schedule.
- Ownership: Employees contributing to a non-governmental plan do not own the plan and their savings could be at risk if your employer goes bankrupt.
403(b) vs. 457(b)
403(b) and 457(b) plans are both sponsored by public sector employers and some non-profit employers.
457(b) plans offer more flexibility, especially for workers who are nearing retirement age.
| Criteria | 403(b) | 457(b) |
|---|---|---|
| Eligibility | Employees of tax-exempt | Public sector employees and employees of certain tax-exempt organizations |
| Contribution Limit | Standard $7,500 for employees age 50 or older $11,250 for workers age 60 to 63 beginning in 2025 | Employees within three years of retirement can contribute double the annual limit or $46,000 $11,250 for workers age 60 to 63 beginning in 2025 |
| Catch-up Contributions | Standard $7,500 for employees age 50 or older $11,250 for workers age 60 to 63 beginning in 2025 | Employees within three years of retirement can contribute double the annual limit or $46,000 $11,250 for workers age 60 to 63 beginning in 2025 |
| Investment Options | Mutual funds or annuities | Vary by plan sponsor, but typically limited to select mutual funds or annuities |
| Withdrawals | Withdrawals made before age 59 ½ are subject to 10% penalty Withdrawals made during retirement are taxed as ordinary income | Withdrawals can be made penalty-free for employees who leave an employer before age 59 ½ Withdrawals made during retirement are taxed as ordinary income |
457(b) vs. 401(k)
While a 457(b) plan allows workers to save for retirement just like a 401(k), it comes with more limits and restrictions.
Depending on how it’s set up, employees may not own their 457(b) plans and are limited in how investments can be made.
| Criteria | 457(b) | 401(k) |
|---|---|---|
| Eligibility | Public sector employees and employees of certain tax-exempt organizations | Private sector employees |
| Contribution Limit | Employees within three years of retirement can contribute double the annual limit or $46,000 $11,250 for workers age 60 to 63 beginning in 2025 | $23,000 (or $30,500 aged 50 or older) $69,000 combined employer and employee contribution |
| Catch-up Contributions | Employees within three years of retirement can contribute double the annual limit or $46,000 $11,250 for workers age 60 to 63 beginning in 2025 | Standard $7,500 for employees age 50 or older $10,000 for workers age 60 to 63 beginning in 2025 |
| Investment Options | Vary by plan sponsor, but typically limited to select mutual funds or annuities | Wider variety of options including stocks, bonds, and mutual funds |
| Withdrawals | Withdrawals can be made penalty-free for employees who leave an employer before age 59 ½ Withdrawals made during retirement are taxed as ordinary income | Withdrawals made before age 59 ½ are subject to 10% penalty Withdrawals made during retirement are taxed as ordinary income |
How to Establish a 403(b) Retirement Plan
A 457(b) plan can only be established by an eligible employer. They will create a plan outlining eligibility requirements, contribution limits, investment options, and withdrawal rules.
To enroll in your employer’s plan:
- Verify your eligibility.
- Elect to enroll in a retirement savings plan. Employees of governmental 457(b) plans are automatically enrolled while employees of non-governmental plans are not.
- Complete all required enrollment paperwork.
- Set up your regular contribution from your paycheck.
- Determine your desired investment allocation.
Is it a good idea to have a 403(b) plan?
A 457(b) is an opportunity to save for retirement while taking advantage of tax benefits that can lower your taxable income. It also comes with flexible withdrawals.
While a 457(b) plan may be the primary option offered by your employer, it isn’t the only way to save for retirement. You can also set up an IRA or park your retirement savings in gold.
Determine what your investment goals are to figure out which retirement savings account is best for you.
FAQs
Who can establish a 457(b) plan?
A 457(b) plan can be established by state or local governments or tax-exempt organizations.
What should I do with my 457(b) after leaving my job?
If you have a governmental 457(b) plan and leave your job, you can roll your savings into another retirement account like an IRA or 401(k).
You can also take a penalty-free withdrawal if you leave your employer before you retire.
What happens if you contribute too much to a 457(b)?
If you contribute too much to a 457(b) you may face tax penalties. You can remove the excess contribution by the tax deadline – April 15 – but if you fail to do so you may be taxed on the contribution and the withdrawal.
How and when can employees withdraw from their 457(b)?
Employees can make withdrawal from a 457(b) plan if they separate from their employer, if their employer stops sponsoring a plan, or if they face a qualified unforeseeable emergency such as a natural disaster.
