457 Retirement Plan Basics and Benefits

A 457 retirement plan is a type of deferred compensation plan that allows you to save for retirement on a tax-deferred basis.

Eligibility for a 457 plan is typically determined by your employer, and it's often offered to government employees, tax-exempt organizations, and certain non-profit organizations.

You can contribute to a 457 plan on a pre-tax basis, which means you won't pay income taxes on the contributions until you withdraw the funds in retirement.

Contributions to a 457 plan are made with after-tax dollars, but the money grows tax-deferred, and withdrawals are taxed as ordinary income.

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A 457 plan is a type of tax-advantaged retirement savings account offered by certain state and local governments and tax-exempt organizations to their employees.

There are two types of 457 plans, each with different rules.

457 plans are available for government employees and certain nonprofit employees.

These plans allow employees to contribute pre-tax dollars, reducing their income, and invest in retirement savings.

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Money in the account can be invested and potentially grow until you take withdrawals, at which point you'll pay taxes on what you take out.

Contributions made to a 457 plan may not be matched by the employer, unlike a 401(k).

A 457 plan is also known as a deferred compensation plan, which is a tax-advantaged benefit that allows employees to save for the future.

Both 457 plans and 401(k) plans allow workers to lower taxable income and invest in retirement savings.

Eligible employees can elect to automatically deduct money from their paychecks on a pre-tax basis, where it’s put into their retirement and investment accounts.

A governmental 457 plan may also include a Roth contribution program, where all or some elective deferrals can be designated as after-tax Roth contributions.

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Eligible employees can participate in a 457(b) plan, but the plan must be limited to a group of highly compensated employees, such as directors or officers, and must follow the Employee Retirement Income Security Act (ERISA) legislation.

The contribution limits for 457(b) plans are the same as for other employer plans, with employees able to contribute up to 100% of their salary up to the IRS annual limit. For 2025, the 457(b) contribution limit is expected to rise to $23,500.

Employees aged 50 and older can make annual catch-up contributions up to a certain amount, which is currently $7,500 in 2025. Additionally, employees may be allowed to make higher contributions during the three years just before they reach retirement age, up to twice the annual limit.

Here are the contribution limits for 457(b) plans for the years 2007 to 2025:

Eligible plans, like 457(b) plans, have a specific limitation in place. These plans must be restricted to a group of more highly compensated employees.

The Employee Retirement Income Security Act (ERISA) legislation requires this limitation, but it doesn't specify the exact level of compensation. Instead, it leaves it up to the employer to set an ascertainable standard.

The highly compensated limit for 401(k) discrimination testing, which is $125,000 a year for 2019 and $130,000 for 2020 or 2021, is likely acceptable for 457(b) plans. This limit helps to ensure that the plan is only available to a select group of employees.

Restricting the plan to a class of employees, such as directors or officers, is also a viable option. This approach is sometimes referred to as a "top hat" plan due to the limitation to higher-compensation employees.

Ineligible 457 plans are made available to nonprofit organizations because they can't have another kind of nonqualified deferred-compensation plan.

These plans are tax deferred and can exceed the normal defined contribution employee deferral limit, which is a big advantage for nonprofits.

The IRS code section 457(f) allows these plans, but they come with specific rules to follow.

To qualify, the deferred amounts must be subject to a vesting schedule, meaning they'll be forfeited if the employee doesn't stay with the employer for the full vesting period.

This vesting schedule is a key factor in determining eligibility for these plans.

In 2004, Congress passed a tax act that added Section 409A to the tax code, which applies to deferred nonqualified compensation, including some 457(f) plans.

This change was in response to the executive bonus plans at Enron, which allowed key employees to access their deferred compensation early if the company got into trouble.

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You can contribute up to 100% of your salary to a 457 plan, and the IRS sets an annual limit on how much you can contribute. For 2025, the limit is $23,500, up from $23,000 in 2024.

In addition to the regular contribution limit, there's a catch-up limit of $7,500 for those aged 50 and older. If you're eligible, you can save an extra $7,500 per year, making your maximum contribution limit $31,000 ($23,500 + $7,500) in 2025.

Catch-up contributions are also available for participants aged 60 to 63 before the end of the tax year, with a maximum catch-up limit of the greater of $10,000 or 150% of the regular catch-up limit.

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Some plans allow employees to contribute up to twice the annual limit during the three years before they reach retirement age, up to a maximum of $47,000 in 2025.

Here's a breakdown of the contribution limits for a 457(b) plan:

Note that some plans may offer more generous contribution limits, but these are the standard limits set by the IRS.

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A 457(b) retirement plan is a tax-advantaged benefit that allows employees to save for the future. It's available for government employees and certain nonprofit employees.

There are two types of 457(b)s, each with different rules. This is important to note, especially if you're considering opening a 457(b) plan.

You can contribute pre-tax dollars to a 457(b) plan, reducing your income. This is done through pre-tax deductions from each paycheck, which are then put into your retirement and investment accounts.

Both 457(b) plans are tax-deferred, meaning the interest and earnings are not taxed until you withdraw your funds during retirement.

A 457(b) retirement plan works similarly to other types of employer-sponsored benefit plans. Eligible employees can elect to automatically deduct money from their paychecks on a pre-tax basis, where it’s put into their retirement and investment accounts.

Employees may be given the option to invest their contributions in mutual funds or annuities. Both are tax-deferred, meaning the interest and earnings are not taxed until employees withdraw their funds during retirement.

A governmental 457(b) plan may also include a Roth contribution program. Under this provision, all or some elective deferrals can be designated as after-tax Roth contributions.

Contributions made to a 457(b) may not be matched by the employer like a 401(k).

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The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) made significant changes to how governmental 457 plans are treated.

The coordination of benefits limitation was removed, allowing individuals to defer the maximum contribution amounts to both their 401(k) and 457 plans.

This means participants can contribute the maximum $19,500 for 2021 into their 401(k) and also the maximum $19,500 into their 457 plan.

If they are at least 50 at the end of the current tax year, they can contribute the additional catch-up amount into each plan, also, meaning an additional $6,500 into the 401(k) and another $6,500 into their governmental 457.

The total deferred would then be $52,000, instead of the $26,000 that would have been allowed if the coordination of benefits provision had not been repealed.

Many governmental employers have now set up 457 and 401(k) plans for their employees, and nonprofit employers have set up 403(b) and 457 plans, each allowing their employees to invest in both.

Some state universities and school districts have access to all three tax-deferred plans, but the total combined annual contribution to 401(k) and 403(b) plans is subject to the $19,500 limit and $6,500 catch-up limit.

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Roth options in 457(b) plans offer a way to save for retirement with tax-free growth and withdrawals.

You can choose to make after-tax contributions to a Roth 457(b) account, which means you pay taxes on the money as you earn it.

The Small Business Jobs Act of 2010 allowed 457(b) plans to include Roth accounts, starting January 1, 2011.

Contributions to a Roth 457(b) account are made with after-tax earnings, and withdrawals are subject to the same age 59.5 restrictions as other Roth plans.

If you have a Roth 457(b) account, you can take withdrawals of both principal and earnings tax-free, but only if you meet the age requirement or other exceptions.

You can make pre-tax 457(b) contributions, Roth 457(b) contributions, or a combination of both, but total contributions cannot exceed the year's contribution limit.

Here are some key differences between pre-tax and Roth 457(b) contributions:

Investment options in a 457 retirement plan are quite flexible. You can fund your plan with group fixed and variable annuities, retail mutual funds, or bank instruments, and some plans even allow a combination of all three.

Withdrawals from a 457 plan are subject to income tax, but you can withdraw funds without penalty for an unforeseeable emergency. These emergencies can include illnesses, accidents, or natural disasters, and you'll need to exhaust other financial options before making a withdrawal.

You can withdraw funds from a 457 plan at any time penalty-free if you're no longer employed by the plan sponsor, or if the plan sponsor stops offering the plan. However, be aware that the default withdrawal is a lump sum, which can significantly increase your tax liability.

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You can withdraw from a 457(b) plan at any time penalty-free if you're no longer employed by the plan sponsor or if the plan sponsor stops offering the plan. This is a big perk, but it's essential to consider your options carefully before withdrawing to avoid a significant tax liability.

Funds can be withdrawn at retirement, upon severance from the employer, upon death, upon disability, and under stringent hardship withdrawal rules. Hardship withdrawals are only allowed for unforeseeable emergencies, such as illness, accident, or natural disaster.

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A 457(b) withdrawal is subject to income tax and wage tax, meaning it must be reported as taxable income on that year's tax return. This can increase your tax liability, so it's crucial to plan correctly.

You might be able to qualify for an unforeseeable emergency distribution, which allows you to withdraw funds early penalty-free while still being employed by the plan sponsor. These distributions can be tricky, so consider consulting with a financial or tax professional first.

Here are the common reasons for withdrawing from a 457(b) plan:

Required Minimum Distributions (RMDs) must be taken from a 457(b) plan starting at age 73, unless you're still working for the plan sponsor. This is a mandatory rule, so be sure to plan accordingly.

Keep in mind that different rules apply if you work for a tax-exempt organization, so be sure to review your employer plan document for specific details.

When investing in a 457(b) plan, you have a variety of options to choose from.

You can fund your plan with group fixed annuities, which can provide a predictable income stream.

Variable annuities are also an option, offering the potential for higher returns but also some level of risk.

Retail mutual funds are another choice, allowing you to diversify your investments and potentially earn higher returns over time.

Bank instruments, such as CDs, can also be used to fund your 457(b) plan, providing a low-risk investment option.

You can also combine all three options to create a diversified investment portfolio.

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Rollovers are a common consideration for retirement plan holders. If you're thinking about rolling over your 401(k) or similar retirement plan, it's essential to check the plan's rules on rollovers.

An employer is not required to accept rollover contributions. This means you'll need to review your 457(b) plan's written document to determine its rules on plan rollovers.

Government 457(b) plans have more liberal rollover provisions. You can roll over assets from a government 457(b) plan to another employer's 457 plan, a 401(k) plan, a 403(b) plan, or a rollover traditional IRA.

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Assets transferred from a 457 plan to a non-457 plan will lose the exemption from the early withdrawal penalty. If you roll non-457 plan assets into an employer-provided 457 plan, these assets will not gain exemption from the early withdrawal penalty.

Here's a summary of rollover options for 457(b) plans: