What Is a 457(b) Plan?
A defined contribution retirement plan under Section 457(b) of the Internal Revenue Code allows certain employees of state and local governments and tax-exempt organizations to save for retirement by deferring compensation on a pre-tax basis. Employees can contribute salary to the 457(b) plan to build their retirement savings.
The term "457(b)" arises from the Internal Revenue Code section that governs these plans. Although similar to 401(k) and 403(b) defined contribution plans in terms of deferring compensation pre-tax, there are specific advantages to using a 457(b) plan versus a 401(k) or 403(b)s plan.
Who Is Eligible for a 457(b) Plan?
457(b) plans are commonly available to:
- State and local government employees
- Public safety workers
- Employees of certain nonprofit organizations
Eligibility and plan features depend on whether the plan is governmental or non-governmental, which affects rollover and withdrawal options.
Contribution Limits
For the year 2024, if you have money in a 457(b) plan, you can contribute as much as $23,000 to your plan. If you are a participant who is age 50 or older, you can also make a catch-up contribution of an additional $7,500.
A few plans will offer a special catch-up provision that gives eligible participants the ability to contribute 2 times the annual contribution limit:
- During the last three years before your 457(b) plan's normal retirement age and
- If the employer offers this feature (it is optional for employers) and if you meet certain eligibility requirements
However, catch-up contributions made under the special catch-up provision may not be combined with the age 50+ catch-up contribution in the same year.
Tax Treatment
Most of the time, 457(b) contributions are pre-tax, thus lowering your taxable income for the year you put in the money. All of the investments grow tax-deferred until you take money out (taxes are usually due when you withdraw funds).
However, a handful of employers provide their employees with a Roth 457(b) option, which is based on an after-tax contribution; therefore, when you qualify for a withdrawal, you will not need to pay any taxes on your earnings!
457(b) Withdrawal Rules
One of the primary advantages to having access to a 457b plan is how much flexibility you have when you withdraw your money from this account.
No Early Withdrawal Penalties
There is no 10% early withdrawal penalty for distributions taken from your 457b account prior to reaching age 59 1/2, which is common with 401k and 403b plans; however, you will still have to pay ordinary income tax on any money you withdraw from your 457b account.
When Withdrawals Are Allowed
When Withdrawals Are Allowed
- Separation from service or retirement
- An approved unforeseeable emergency (as defined by IRS rules)
Required Minimum Distributions (RMDs)
Participants must begin taking RMDs by April 1 of the year following the year they turn 73, unless still working and the plan allows deferral.
Rollover Options and Plan Qualification
- Governmental 457(b) plans are considered eligible retirement plans and can generally be rolled over into IRAs, 401(k)s, 403(b)s, or other governmental 457(b) plans.
- Non-governmental 457(b) plans are non-qualified and have more limited rollover options, typically allowing transfers only to another non-governmental 457(b) plan
457(b) vs. 401(k) and 403(b)
While all three plans offer tax-deferred retirement savings, the 457(b) stands out for:
- Penalty-free withdrawals after separation from service
- Unique catch-up contribution rules
- Availability mainly to government and select nonprofit employees