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How 457 Plans Work: Contribution Limits, Tax Treatment, and Withdrawal Rules

By Felix Thorpe · Retirement Accounts Writer

A 457 plan is a tax-deferred retirement savings account for state and local government employees and certain nonprofit workers

A 457 plan (also called a 457(b) plan) lets you set aside pre-tax income for retirement. Your employer — a state agency, city, county, school district, or certain tax-exempt organization — runs the plan. Money you contribute reduces your taxable income for that year, grows tax-free inside the account, and you pay income tax only when you withdraw it in retirement.

The defining feature of a 457 plan is that it has its own contribution limit, separate from 401(k) and 403(b) plans. If you work for a government employer, you cannot contribute to both a 457 and a 401(k) in the same year using the same income — but you can contribute to a 457 and a 403(b) together, or a 457 and an IRA. The rules around when you can withdraw money are also different from other retirement accounts, and in some cases more flexible.

Key Takeaways

  • A 457 plan is only available through state and local government employers or certain nonprofits, not private companies.
  • Your contributions are made with pre-tax dollars, lowering your taxable income in the year you contribute.
  • The 2024 contribution limit is $23,500 per year, with a catch-up provision allowing an extra $7,850 if you are age 50 or older.
  • You can withdraw money penalty-free once you separate from service, regardless of age, which is a major advantage over 401(k)s and IRAs.
  • If your employer offers a 457(f) plan instead of a 457(b), the rules are stricter and the account is subject to forfeiture if you leave before vesting.

Who can open a 457 plan and where to get one

You can only open a 457 plan through your employer. If you work for a state government, city, county, school district, or public university, your employer likely offers one. Some tax-exempt organizations — hospitals, charities, and educational nonprofits — also sponsor 457 plans, though not all do.

If your employer offers a 457 plan, you will enroll through your benefits office or HR department, usually during an open enrollment period or when you are first hired. You cannot open a 457 plan on your own or through a bank or brokerage the way you can with an IRA. The plan document and investment options are determined by your employer, so what is available depends on which organization you work for.

Contribution limits and catch-up rules for 2024

For 2024, you can contribute up to $23,500 of your salary to a 457 plan. This is the same limit as a 401(k), but it is a separate limit — if you also contribute to a 403(b) through the same employer, you can contribute to both in the same year. However, if your employer offers both a 457 and a 401(k), you cannot split the $23,500 limit between them; you must choose one account or the other.

If you are age 50 or older, you can make an additional catch-up contribution of $7,850 in 2024, bringing your total to $31,350. Some 457 plans also allow a special catch-up in your final three years before retirement, which can double your contribution limit in those years — but this is optional and depends on whether your plan document includes it. Check with your benefits office to see if your plan allows this feature.

These limits change each year based on inflation. The IRS announces the new limits in October for the following year, so your employer will notify you of any increase to the contribution cap.

Tax treatment: when you pay tax on your contributions and growth

Money you contribute to a 457 plan is taken from your paycheck before federal income tax is calculated, so it lowers your taxable income for that year. If you contribute $10,000 to your 457 plan, your W-2 will show $10,000 less in wages, and you will owe less federal income tax that year.

The money inside your 457 account grows tax-free. If you invest in mutual funds that earn dividends or capital gains, or if you hold individual stocks that appreciate, you do not pay tax on that growth while the money is in the account. You only pay tax when you withdraw the money, at which point the entire withdrawal — both your contributions and all the growth — is taxed as ordinary income.

This is different from a Roth 401(k) or Roth IRA, where contributions are made with after-tax dollars but withdrawals are tax-free. With a traditional 457 plan, you get the tax break upfront, not on the way out.

Withdrawal rules: the major advantage of a 457 plan

The most significant difference between a 457 plan and a 401(k) or traditional IRA is when you can withdraw money without a penalty. With a 401(k) or IRA, you generally cannot withdraw before age 59½ without paying a 10% early withdrawal penalty (with narrow exceptions). With a 457 plan, you can withdraw money penalty-free once you separate from service — meaning you leave your job — at any age.

If you retire at 52 and leave your government job, you can start withdrawing from your 457 plan immediately without the 10% penalty. You will still owe income tax on the withdrawal, but there is no early withdrawal penalty. This makes a 457 plan particularly valuable for people who plan to retire before 59½.

You must begin taking required minimum distributions (RMDs) from your 457 plan by April 1 of the year after you turn 73. The amount is calculated based on your age and account balance, using IRS life expectancy tables. If you do not take the full RMD, you owe a 25% penalty on the amount you should have withdrawn (or 10% if you correct it within two years).

The difference between 457(b) and 457(f) plans

Most government employees have access to a 457(b) plan, which is the standard version. Money in a 457(b) belongs to you immediately — you are always fully vested. If you leave your job, the money stays in your account and you can withdraw it or leave it invested.

Some employers, particularly smaller nonprofits, offer a 457(f) plan instead. A 457(f) plan can include a vesting schedule, meaning you do not own the full balance until you have worked there for a certain number of years. If you leave before you are fully vested, you forfeit the unvested portion — usually the employer's contributions. Additionally, a 457(f) plan is subject to different tax rules and may not offer the same penalty-free withdrawal at separation. If your employer offers a 457(f), read the plan document carefully or ask your HR department to explain the vesting schedule and withdrawal rules.

Rolling over a 457 plan to another account

When you leave your job, you can roll your 457 balance into another retirement account. You can roll it into a traditional IRA, a 401(k) at a new employer, or a 403(b) if you move to a nonprofit or school. A rollover is a direct transfer from your 457 plan to the new account, and it is not taxed as long as the money goes directly from one plan to the other.

If you take a distribution from your 457 plan and then deposit it into another account yourself (rather than having the plan transfer it directly), you have 60 days to complete the rollover or the withdrawal will be taxed as ordinary income. Direct rollovers are simpler and safer, so request a direct rollover from your plan administrator when you leave.

One important rule: you cannot roll a 457 plan into a Roth IRA or Roth 401(k) without paying tax on the full amount. A rollover to a Roth is treated as a conversion, and you owe income tax on the entire balance in the year you roll it over.

Frequently Asked Questions

Can I withdraw from my 457 plan while I am still working?

Most 457 plans do not allow withdrawals while you are employed, with limited exceptions for financial hardship. Once you separate from service, you can withdraw without penalty. Some plans allow loans, which let you borrow against your balance and repay it through payroll deductions — check your plan document to see if loans are available.

What happens to my 457 plan if I die before retirement?

Your beneficiary — the person you named on your plan documents — inherits the balance. They can take a lump-sum distribution, roll it into an inherited IRA, or take distributions over time, depending on the plan rules and their relationship to you. Make sure your beneficiary designation is current.

Can I contribute to both a 457 plan and an IRA in the same year?

Yes. A 457 plan limit is separate from IRA limits. You can contribute $23,500 to a 457 and also contribute up to $7,000 to a traditional or Roth IRA in 2024 (or $8,000 if you are age 50 or older). However, if you have a high income, your IRA deduction may be limited by IRS rules.

What if my employer stops offering the 457 plan?

If your employer terminates the plan, you will receive a notice explaining your options. You can usually roll the balance into an IRA or another employer plan, or take a distribution. The plan administrator will provide instructions on how to proceed.

Do I pay state income tax on 457 plan withdrawals?

Yes, in most states. Withdrawals from a 457 plan are subject to state income tax in the state where you live when you withdraw the money. Some states offer tax breaks for retirement income, but those vary by state and by account type. Check your state's tax rules or speak with a tax professional about your specific situation.