What is a 457 plan?
– A 457 plan is a tax-favored retirement savings program available to many state and local government employees and certain nonprofit workers. It functions like a workplace deferred‑compensation plan: you elect to put part of your pay into the account now and pay income tax on those deposits later, when you withdraw funds in retirement. Some plans also offer a Roth (after‑tax) option.
Two common types
– 457(b): The standard version most employees encounter. Participants typically invest in mutual funds, annuities, or other options the plan offers. Contributions are normally pretax unless you choose a Roth option.
– 457(f): A supplemental deferred‑compensation arrangement for highly paid executives at certain tax‑exempt organizations; it’s generally used as an extra retirement benefit and follows different tax rules.
Key features and definitions
– Pretax contribution: Money put into the account before income tax is applied, lowering taxable income in the contribution year.
– Roth contribution: Money contributed after tax; qualified withdrawals are tax‑free.
– Catch‑up contribution: An extra amount older participants may be allowed to add in addition to the standard annual limit.
– Super catch‑up (SECURE 2.0): A provision that allows larger catch‑up contributions for eligible people in their early 60s (typically ages 60–63), using either a dollar amount or a percentage of the standard catch‑up—whichever is higher.
– Double‑limit catch‑up: Some 457(b) plans permit, for up to three years before normal retirement age, contributions up to twice the annual limit.
– Required minimum distribution (RMD): The IRS‑mandated minimum withdrawal from tax‑deferred retirement accounts starting at a specified age. SECURE 2.0 raised the RMD start age to 73 for many taxpayers.
– Vesting: If your employer contributes, those employer contributions may be subject to a schedule that delays your right to keep them if you leave the job.
– Rollover: Moving retirement assets from one tax‑advantaged plan to another. Note: rolling a 457(b) distribution into a different retirement plan may trigger rules that change early‑withdrawal penalties.
Advantages
– Lowers current taxable income when you use pretax contributions.
– No general 10% IRS early‑withdrawal penalty for distributions from governmental 457(b) plans, even if you take money before age 59½—provided the money stays in the 457. (If you roll the balance into another plan, different rules and penalties can apply.)
– Some plans offer flexible early distribution options if you leave employment.
– Roth option available in many plans for after‑tax savings.
Disadvantages / limitations
– Employer matches are less common than in 401(k) plans; when present, employer contributions generally count toward the plan’s contribution limits.
– Investment choices may be narrower than in private‑sector 401(k)s.
– Employer contributions (if any) may be subject to vesting schedules.
– Rules differ between governmental 457(b)s and non‑governmental 457(b)s; plan documents matter.
How a 457 compares to 401(k) and 403(b)
– Functionally similar to a 401(k) and 403(b) in letting you defer income and invest for retirement.
– 403(b) is another public‐sector/nonprofit plan; contribution limits are generally the same across 401(k), 403(b), and 457(b), but administrative and distribution rules differ.
– A key difference: governmental 457(b) plans generally do not impose the 10% additional federal tax on early distributions that applies to other plans; however, that protection may be lost on rollovers.
Withdrawals and taxes
– Withdrawals from pretax 457 amounts are taxed as ordinary income when you take them.
– Governmental 457(b) plans typically allow penalty‑free early withdrawals if you separate from service, but check plan rules for “unforeseeable emergency” or other distribution options.
– RMD rules apply once you reach the IRS age threshold (73 for many people under SECURE 2.0; timing exceptions exist for those who reached 72 in 2023).
Step‑by‑step checklist to evaluate a 457 plan
1. Confirm eligibility: Is the plan governmental 457(b), tax‑exempt 457(b), or 457(f)?
2. Review contribution rules: Ask the plan administrator for current annual limits, catch‑up provisions, and whether Roth contributions are allowed.
3. Check employer contributions: Does your employer match? If so, how are they treated (immediate or vested over time)?
4. Examine investment menu: What funds/annuities are offered? Compare fees and historical performance.
5. Understand distribution rules: When can you withdraw, what counts as an emergency, and are there special catch‑up or double‑limit options?
6. Learn rollover implications: Will moving money into another plan create an early‑withdrawal penalty risk?
7. Confirm RMD rules and dates: Note when RMDs will begin for your situation.
8. Get documentation: Obtain the plan summary and the most recent fee and investment disclosures.
Worked numeric example (illustrative)
– Situation: You earn $60,000 a year and contribute 10% of salary to a pretax 457(b).
– Annual contribution: 10% × $60,000 = $6,000.
– Tax effect this year (example): If your marginal federal tax rate is 22%, the pretax contribution reduces current federal income tax by about 0.22 × $6,000 = $1,320. (State taxes may also be reduced.)
– Growth: If the $6,000 earns 5% annually compounded for 20 years, future value ≈ $6,000 × (1.05)^20 ≈ $19,972.
– Tax at withdrawal: Withdrawals of gains and pre‑tax contributions are taxed as ordinary income at your rate in retirement.
– Notes: This example ignores employer match, fees, and state tax variations; it’s for illustration only.
Practical tips
– Always read your specific plan’s summary plan description and investment disclosures—rules and options vary.
– If you change jobs, check rollover rules before moving money; a rollover could change penalty treatments.
– If you’re near retirement, ask the administrator about double‑limit or super catch‑up eligibility and documentation requirements.
– Compare after‑tax (Roth) vs pretax contributions based on your expected retirement tax bracket and other savings.
Selected authoritative sources
– Internal Revenue Service — IRC 457(b) Deferred Compensation Plans
https://www.irs.gov/retirement-plans/irc-457b-deferred-compensation-plans
– Internal Revenue Service — Retirement Topics: 457(b) Contribution Limits
https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-457b-contribution-limits
– Thrift Savings Plan — SECURE Act 2.0, Section 109: Higher Catch‑Up Limit to Apply at Age 60–63
https://www.tsp.gov/plan-participant/retirement-planning/secure-act-2-0/
– MissionSquare Retirement — 457(b) Catch‑Up Rules & Limits
https://www.missionsq.org/knowledge-center/retirement-resources/457-catch-up
– Investopedia — 457 Plan Overview
https://www.investopedia.com/terms/1/457plan.asp
Educational disclaimer
This explainer is for general education only and is not individualized financial, tax, or legal advice. Plan details and IRS rules change; consult your plan documents and a qualified tax or financial advisor before making decisions about contributions, rollovers, or distributions.