How 457 Plans Work: Contribution Limits, Withdrawals, and Tax Treatment

A 457 plan lets you set aside pre-tax income through your employer, with the money growing tax-deferred until you withdraw it in retirement

A 457 plan is a tax-advantaged retirement savings account offered by state and local government employers, and some nonprofit organizations. You contribute a portion of your paycheck before taxes are withheld, reducing your taxable income for the year. The money sits in the account and grows without being taxed on the gains. When you withdraw the funds — typically after you leave your job or reach age 59½ — you pay income tax on the withdrawals at your ordinary tax rate.

The mechanics are straightforward: your employer deducts contributions directly from your paycheck and sends them to the plan administrator. You choose how to invest the money from the options your plan offers, usually mutual funds or stable value funds. Unlike a 401(k), a 457 plan has no early withdrawal penalty if you leave your job, though you still owe income tax on what you withdraw. The plan is named for the section of the Internal Revenue Code that created it.

Key Takeaways

• You contribute pre-tax dollars through payroll deduction, which lowers your taxable income for the year you contribute.
• The contribution limit for 2024 is $23,500 per year if you work for a government employer, or $35,250 if you are age 50 or older and your plan allows catch-up contributions.
• You can withdraw money after you leave your job without the 10 percent early withdrawal penalty that applies to 401(k)s, though you still owe income tax on the withdrawal.
• Money in a 457 plan grows tax-deferred, meaning you do not pay tax on investment gains until you withdraw the funds.
• If your employer offers both a 457 and a 403(b), you can contribute the maximum to each plan in the same year, effectively doubling your annual savings.

Contribution limits and how they work

The annual contribution limit for a 457 plan is set by the IRS and changes each year. For 2024, the limit is $23,500 per year. This is the total amount you can contribute across all 457 plans you participate in during a single calendar year — you cannot split the limit between two employers.

If you are age 50 or older, your plan may allow catch-up contributions, which let you contribute an additional $7,750 in 2024, bringing your total to $31,250. Some plans also offer a special catch-up provision in the final three years before your normal retirement date, which can allow contributions up to twice the standard limit in those years. Check with your plan administrator to see whether your specific plan allows catch-up contributions and which version applies to you.

The contribution limit applies to your salary deferrals only — it does not include any employer match or employer contributions. If your employer makes contributions on your behalf, those are separate and do not reduce your ability to contribute the full employee limit.

Tax treatment: when you pay, when you do not

Contributions to a 457 plan are made with pre-tax dollars, meaning the money comes out of your paycheck before federal income tax is calculated. If you contribute $500 per paycheck, your taxable income for that paycheck is reduced by $500. This lowers your federal income tax bill for the year.

The investment gains inside the account — dividends, interest, capital gains — are not taxed while the money remains in the plan. This tax deferral is one of the main advantages of using a 457. If you invested the same money in a regular taxable brokerage account, you would owe tax each year on the gains.

When you withdraw money from the plan, the entire withdrawal amount is taxed as ordinary income at your tax rate in the year you withdraw it. If you withdraw $50,000 in a single year, that $50,000 is added to your other income for the year and taxed accordingly. There is no special tax rate for 457 withdrawals — they are treated the same as wages or other ordinary income.

Withdrawal rules and the absence of early withdrawal penalties

A key difference between a 457 plan and a 401(k) is that you can withdraw money from a 457 without a 10 percent early withdrawal penalty, as long as you have separated from service — meaning you no longer work for the employer that sponsors the plan. This applies regardless of your age. If you leave your job at age 45, you can withdraw from your 457 without penalty.

You must still pay ordinary income tax on the withdrawal. The penalty exemption only removes the extra 10 percent tax; it does not eliminate the income tax itself. If you withdraw $30,000 and your tax bracket is 22 percent, you owe $6,600 in federal income tax on that withdrawal.

If you are still employed by the sponsor, you generally cannot withdraw money from the plan except in cases of financial hardship. The definition of hardship varies by plan, but typically includes medical expenses, housing costs, or other immediate needs. Your plan document spells out which hardships may have access to. Some plans also allow loans against your 457 balance, though not all do.

What happens when you change jobs

When you leave your employer, you have several options for the money in your 457 plan. You can leave it in the plan if your former employer allows it, withdraw it in a lump sum, or roll it over to an Individual Retirement Account (IRA) or to a 457 plan at a new government employer.

A rollover to an IRA preserves the tax-deferred status of the money and gives you more investment choices than most employer plans offer. However, if you roll 457 money into a traditional IRA, you lose the separation-from-service withdrawal advantage — once the money is in an IRA, you cannot withdraw it before age 59½ without owing the 10 percent early withdrawal penalty (with some exceptions like disability or medical expenses).

If you move to another government employer with a 457 plan, you can roll the money directly into that new plan and keep the separation-from-service advantage intact. This is often the best option if your new employer's plan has reasonable investment choices and low fees.

How 457 plans differ from 401(k)s and 403(b)s

A 457 plan is designed for government and nonprofit workers, while a 401(k) is the standard retirement plan for private-sector employees. The most important difference is the withdrawal rule: you can withdraw from a 457 without penalty after leaving your job, but a 401(k) withdrawal before age 59½ triggers a 10 percent penalty (with limited exceptions).

The contribution limits are the same for 457 and 401(k) plans — $23,500 in 2024 — but the rules for combining them differ. If you work for a government employer that offers both a 457 and a 403(b), you can contribute the maximum to each plan in the same year. This is not true for 401(k)s and 403(b)s; if you have both, the combined contributions cannot exceed the annual limit.

A 403(b) is similar to a 401(k) but is used by schools, hospitals, and other nonprofit organizations. Like a 401(k), it has the 10 percent early withdrawal penalty before age 59½. A 457 plan, by contrast, has no such penalty after separation from service.

Investment options and how to choose them

Your 457 plan offers a menu of investment options, typically mutual funds focused on stocks, bonds, or a mix of both. Some plans also offer a stable value fund, which aims to preserve principal and provide modest returns with low volatility. The specific funds available depend on your plan administrator and your employer's contract with the investment provider.

You direct how your contributions are invested by choosing which funds to buy. Most plans allow you to split your contribution among multiple funds — for example, 60 percent in a stock index fund and 40 percent in a bond fund. You can usually change your allocation once per quarter or more frequently, depending on your plan's rules.

The fees charged by your plan vary. Some plans are low-cost, with expense ratios under 0.5 percent per year. Others charge significantly more. Request a fee disclosure from your plan administrator so you know what you are paying. High fees can reduce your long-term returns substantially, so it is worth understanding what your plan costs.

Frequently Asked Questions

Can I withdraw from my 457 plan before I leave my job?

Generally no, unless your plan allows loans or you meet your plan's definition of financial hardship. Most plans do not allow regular withdrawals while you are still employed. Check your plan document or contact your plan administrator to see whether loans or hardship withdrawals are available in your specific plan.

What happens to my 457 if I die before I retire?

Your beneficiary — the person you named on your plan documents — inherits the money. They can withdraw it as a lump sum or, in some cases, roll it into an IRA. The money is subject to income tax when withdrawn, but there is no additional estate tax on 457 balances. Make sure your beneficiary designation is current.

Can I contribute to both a 457 and a 403(b) in the same year?

Yes, if your employer offers both plans. You can contribute the full limit to each plan separately in the same year. This is different from a 401(k) and 403(b), where the limits combine. If you work for a government employer with both a 457 and a 403(b), you could contribute $23,500 to each in 2024.

Do I have to take required minimum distributions from my 457?

Yes, but the rules are different from a traditional IRA or 401(k). You must begin withdrawals by April 1 of the year after you reach age 73 (as of 2023, this age increased from 72). The amount is calculated based on your life expectancy and your account balance. Your plan administrator can calculate this for you.

What is the difference between a Roth 457 and a traditional 457?

A traditional 457 uses pre-tax contributions, which lower your current taxable income. A Roth 457 uses after-tax contributions, so you pay tax now but withdrawals in retirement are tax-free. Not all plans offer a Roth option. If yours does, a Roth 457 makes sense if you expect to be in a higher tax bracket in retirement than you are now.