457 Plan

What is a 457 plan?

A 457 plan is a tax-advantaged retirement savings plan available to employees of state and local governments and some tax-exempt organizations. The most common form is the 457(b), which lets participants defer income into a retirement account on a pre-tax basis (reducing current taxable income) or, if offered, as after-tax Roth contributions. Earnings grow tax-deferred and are taxed when withdrawn in retirement.

Key takeaways

• 457(b) plans are for government and certain nonprofit employees.
• Contributions generally reduce current taxable income; Roth options use after-tax dollars.
• Earnings are tax-deferred until withdrawal.
• 457(f) plans are supplemental arrangements for highly compensated executives.

Contribution limits and catch-ups

• Employees may contribute up to 100% of their salary, subject to the IRS annual dollar limit (adjusted for inflation).
• Plans may allow a standard catch-up for participants aged 50 and older.
• SECURE 2.0 created a “super catch-up” allowing higher limits for participants aged 60–63 (based on a higher dollar amount or a percentage of the standard catch-up, whichever is greater).
• The 457 “double limit” special catch-up can permit contributions up to twice the annual limit for up to three years immediately before normal retirement age, if plan rules allow.
• Employer contributions, if offered, count toward the plan’s contribution limits and may be subject to vesting schedules.

Required minimum distributions (RMDs)

RMD rules apply. Under SECURE 2.0, the age for required minimum distributions is generally 73 (subject to transitional rules for those who turned 72 in 2023).

Withdrawals and penalties

• Unlike many other retirement plans, distributions from a 457 plan after separation from service are not subject to the IRS’s 10% early-withdrawal penalty—even if taken before age 59½.
• 457 plans may permit penalty-free distributions for unforeseeable emergencies while employed, subject to plan rules.
• If funds are rolled over from a 457 into another tax-advantaged plan (for example, a 401(k)) and then distributed early, the typical early-withdrawal penalty rules for that destination plan can apply.
• RMD rules still require withdrawals once the participant reaches the applicable age.

Advantages

• Contributions reduce current taxable income (traditional option).
• No 10% federal early-withdrawal penalty on distributions after separation from service.
• Roth option (if offered) provides tax-free qualified distributions in retirement.

Disadvantages

• Employer matching is less common than in private-sector plans; when provided, employer contributions count toward plan limits.
• Employer contributions may be subject to vesting schedules.
• Investment choices can be more limited compared with many private-sector 401(k) plans.

How a 457 compares to similar plans

• 403(b): Available to employees of public schools and certain nonprofits. Historically focused on annuities, 403(b) plans now commonly offer mutual funds. Contribution limits are generally the same as 401(k) and 457(b) deferral limits.
• 401(k): Private-sector equivalent in many ways (tax-deferral, Roth option). The major operational differences for many participants are employer matching practices, plan investment options, and withdrawal penalty rules.
• 457(f): A supplemental executive arrangement (often called a SERP) for highly compensated employees at tax-exempt organizations; typically used to provide additional deferred compensation to executives and is governed by different tax and vesting rules.

Bottom line

A 457(b) is a useful retirement vehicle for government and certain nonprofit employees. It offers tax deferral, flexible withdrawal options when leaving employment, and special catch-up opportunities. Plan terms (Roth availability, catch-up options, investment lineup, and employer contributions) vary by employer, so review your plan’s specific rules when deciding how to use a 457 alongside other retirement accounts.