A 457 account is a retirement savings plan for state and local government workers and some nonprofit employees
A 457 account (officially a 457(b) deferred compensation plan) lets you set aside money from your paycheck before taxes are taken out, similar to a 401(k) but designed specifically for public sector workers. Your employer — a city, county, state agency, school district, or certain nonprofits — runs the plan. The money grows tax-free until you withdraw it in retirement, at which point you pay income tax on it.
The main difference between a 457 and a 401(k) is who can use it. If you work for a government agency or a tax-exempt organization, your employer may offer a 457 instead of or alongside a 401(k). The contribution limits and withdrawal rules are also different, which matters when you're planning how much to save and when you can access the money.
Key Takeaways
- A 457 account is a tax-deferred retirement plan available to state, local, and federal government employees, plus some nonprofit workers.
- You contribute pre-tax dollars from your paycheck, and the money grows without being taxed until you withdraw it.
- Contribution limits for 2024 are $23,500 per year, with a catch-up option of an additional $7,000 if you are within three years of your plan's normal retirement age.
- Unlike a 401(k), you can withdraw money from a 457 without a 10% early withdrawal penalty if you separate from your employer, regardless of age.
- Your employer chooses the investment options available in the plan, so what you can invest in depends on where you work.
How contributions work and what comes out of your paycheck
When you enroll in a 457 plan, you decide what percentage of your paycheck to contribute — up to the annual limit set by the IRS. That amount is deducted from your gross pay before income tax is calculated, which lowers your taxable income for the year. If you contribute $500 per month, for example, your employer withholds that $500 before calculating federal and state income taxes.
Your employer does not contribute to the plan on your behalf (though some do offer matching contributions — ask your benefits office). The money you contribute is yours entirely. Your employer straightforward holds the account and processes the payroll deductions.
The annual contribution limit for 2024 is $23,500. If you are within three years of your plan's stated normal retirement age, you can contribute an additional $7,000 per year — this is called the catch-up contribution. Some plans also allow a special catch-up in your final three years before retirement, which can be much higher; check with your plan administrator to see if yours does.
How the money grows and what taxes you owe later
Once your money is in the account, it sits in whatever investments your plan offers — typically mutual funds, target-date funds, or stable value funds. You do not pay taxes on the growth each year. If your account balance grows from $50,000 to $55,000, you do not owe tax on that $5,000 gain. The tax bill comes later, when you withdraw the money.
When you retire and start taking withdrawals, each dollar you withdraw is taxed as ordinary income at your federal and state tax rates. If you withdraw $30,000 in a year and you are in the 22% federal tax bracket, you owe roughly $6,600 in federal tax on that withdrawal (plus state tax if your state has income tax). The money you contributed was never taxed, and the growth was never taxed, but the withdrawal is fully taxable.
When you can withdraw money without penalty
The biggest advantage of a 457 over a 401(k) is the withdrawal rule. With a 401(k), if you withdraw money before age 59½, you owe a 10% early withdrawal penalty plus income tax. With a 457, there is no early withdrawal penalty — ever. If you leave your job at age 45, you can withdraw from your 457 without the 10% penalty.
However, you still owe income tax on the withdrawal. And your plan may have its own rules about when you can actually access the money. Most plans allow withdrawals only after you separate from your employer, reach your plan's normal retirement age, or face an unforeseeable emergency (which the plan defines narrowly — usually death, disability, or severe financial hardship). Read your plan documents or ask your benefits office what triggers are available in your specific plan.
If you leave your job and want to keep the money in the 457 without withdrawing it, you can usually do that. The account stays open and continues to grow tax-free. Some plans require you to start withdrawals at age 73 (the current age for required minimum distributions), but rules vary by plan.
The difference between a 457(b) and a 457(f)
There are two types of 457 plans: the 457(b) and the 457(f). The 457(b) is the standard plan for most government and nonprofit employees. The 457(f) is much less common and is used only for a small group of highly paid executives or elected officials. Unless your employer specifically told you that you are in a 457(f), you have a 457(b).
The key difference is that a 457(f) has different vesting rules and may require you to forfeit the money if you leave before a certain date. If you think you might be in a 457(f), ask your plan administrator directly — the rules are complex and depend entirely on your employer's plan document.
Rolling over a 457 to another retirement account
When you leave your job, you can roll your 457 balance into an Individual Retirement Account (IRA) or, if your new employer offers one, into their 401(k) or 403(b) plan. A rollover moves the money directly from one account to another without you touching it, so there is no tax bill and no early withdrawal penalty.
Rolling over can be useful if your new employer's plan has better investment options or lower fees than your old 457. It also consolidates your retirement savings in one place. However, once you roll a 457 into an IRA, the special 457 withdrawal rules no longer explore — you will then be subject to the 10% early withdrawal penalty if you take money out before age 59½.
You do not have to roll over. You can leave the money in your old 457 plan and let it continue to grow, or you can withdraw it and pay income tax. The choice depends on your situation and your plan's rules about former employees.
How a 457 fits into your overall retirement plan
A 457 is one piece of your retirement income. Most government employees also have access to a pension — a defined benefit plan that pays you a monthly amount based on your years of service and salary. If you have both a pension and a 457, the pension typically provides your base retirement income, and the 457 is extra savings you build on top of that.
Some government workers also have access to Social Security, depending on their job and employer. Check with your benefits office about what you are may have access to to. The combination of a pension, a 457, and Social Security can create a solid retirement income, but only if you understand how each one works and plan accordingly.
If your employer does not offer a pension, the 457 becomes more important — it is your main tax-advantaged retirement savings vehicle. In that case, contributing as much as you can afford is usually a good strategy.
Frequently Asked Questions
Can I have both a 401(k) and a 457 at the same time?
Yes, if your employer offers both. Some government agencies offer both plans, and you can contribute to each up to the annual limit. However, the limits are separate — you can contribute $23,500 to a 401(k) and $23,500 to a 457 in the same year, for a total of $47,000. Check with your benefits office about what your employer offers.
What happens to my 457 if I die before I retire?
The money goes to your beneficiary — whoever you named on the account. Your beneficiary can either withdraw the balance and pay income tax on it, or roll it into an inherited IRA and take withdrawals over time. Make sure your beneficiary designation is current and matches your wishes.
Can my employer take money from my 457 if I owe them money?
In rare cases, yes. If you owe your employer money — for example, if you received a signing bonus and left before the vesting period — they may be able to offset your 457 balance. This is unusual and depends on your plan document. Ask your benefits office if this is a concern.
Do I have to withdraw all my money at once when I retire?
No. Most plans let you take withdrawals gradually over time, which can help you manage your tax bill. You can take a lump sum, set up monthly payments, or take withdrawals whenever you need them. Your plan administrator can explain the options available in your specific plan.
What if my plan offers poor investment options?
Your employer chooses what investments are available, so your options are limited to what they offer. If the fees are high or the choices are limited, rolling over to an IRA after you leave your job gives you access to a much wider range of investments. Until then, choose the best option available within your plan.