How a 457(b) Plan Works: Contributions, Withdrawals, and Tax Treatment

A 457(b) is a tax-deferred savings account for certain government and nonprofit employees

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 with different rules about when you can withdraw it. The account grows tax-free until you take the money out, usually in retirement. Only employees of state and local governments, the federal government, and certain tax-exempt organizations can use one—not private company workers.

The key difference from a 401(k) is that 457(b) plans have their own withdrawal rules. You can generally take money out without penalty once you leave your job, reach age 59½, or face an unforeseeable emergency. There is no 10 percent early withdrawal penalty the way there is with 401(k)s, which makes a 457(b) more flexible if you need the money before traditional retirement age.

Key Takeaways

• You contribute pre-tax dollars through payroll deduction, and the money grows tax-deferred until withdrawal.
• Contribution limits are set by the IRS each year and are separate from 401(k) or 403(b) limits if you have those plans too.
• You can withdraw money without the 10 percent early withdrawal penalty once you separate from service, reach 59½, or face an unforeseeable emergency.
• Distributions are taxed as ordinary income in the year you receive them, but you avoid taxes on the growth while the money is in the account.

How much you can contribute each year

The IRS sets an annual contribution limit for 457(b) plans. For 2024, the limit is $23,500 (this amount changes most years, so check your plan documents or the IRS website for the current year). You contribute through automatic payroll deduction, so the money comes out before your employer calculates your federal income tax.

If you are age 50 or older, you may be able to make an additional catch-up contribution—an extra $7,500 in 2024. Some plans also allow a special catch-up in your final three years before retirement, which can be much larger. Ask your plan administrator whether your specific plan offers these options, because not all do.

Your contributions are separate from any 401(k) or 403(b) you might have through another job. If you work for a government employer that offers both a 457(b) and a 401(k), you can contribute the full limit to each plan in the same year—they do not reduce each other.

Tax treatment: what you pay now and later

Money you put into a 457(b) reduces your taxable income for the year you contribute it. If you earn $60,000 and contribute $10,000 to your 457(b), you report only $50,000 as income to the IRS. This lowers your federal income tax bill immediately.

The money inside the account—your contributions and any investment gains—is not taxed while it sits there. If your balance grows from $50,000 to $75,000 over five years, you do not owe tax on that $25,000 gain until you withdraw it. When you do withdraw, the entire amount (contributions plus growth) is taxed as ordinary income in the year you take it out.

This is different from a Roth 401(k) or Roth IRA, where contributions go in after-tax but withdrawals are tax-free. A 457(b) is always pre-tax, so you defer the tax bill to retirement.

When you can withdraw without penalty

The main advantage of a 457(b) over a 401(k) is that you can withdraw money without a 10 percent early withdrawal penalty in three situations: when you leave your job, when you turn 59½, or when you face an unforeseeable emergency.

Separation from service means you quit, are laid off, or retire. Once you no longer work for the employer that sponsors the plan, you can withdraw your balance. You will owe income tax on the withdrawal, but no penalty. This is true even if you are 35 years old—age does not matter for this rule.

An unforeseeable emergency is defined narrowly by the IRS: a severe financial hardship caused by illness, accident, loss of property, or other circumstances beyond your control. You cannot withdraw just because you want to buy a house or pay off credit card debt. Your plan administrator decides whether your situation meets the definition, and you must show documentation of the hardship.

How distributions work in practice

When you leave your job or turn 59½, you contact your plan administrator to request a distribution. You can usually choose to take a lump sum (all the money at once) or set up monthly or annual payments. Some plans require you to begin withdrawals at age 73, following the same required minimum distribution rules as 401(k)s.

The plan administrator withholds federal income tax from your distribution—typically 20 percent for a lump sum, though you can request a different amount. You receive the after-tax portion, and the withheld amount goes to the IRS. When you file your tax return, the actual tax you owe is calculated, and you either get a refund or owe more.

If you have a large balance and take it all at once, the entire amount is added to your income for that year, which could push you into a higher tax bracket. Some people spread withdrawals over several years to keep their annual income lower and reduce their tax bill.

Rolling over a 457(b) to another account

You can move money from a 457(b) to an IRA or to a 401(k) at a new employer, but the rules are strict. A direct rollover—where the plan sends the money straight to the new account—is the safest route because no tax is withheld and the transfer does not count as a distribution.

If you receive a check from your 457(b) plan, you have 60 days to deposit it into an IRA or another 457(b) to avoid taxes and penalties. If you miss the deadline, the full amount is taxed as income and subject to the 10 percent early withdrawal penalty (unless you are 59½ or separated from service).

Not all IRAs or 401(k)s accept 457(b) rollovers, so confirm with the receiving institution before you request the transfer. Some employers also do not allow incoming rollovers into their 401(k), so you may need to open an IRA instead.

How a 457(b) differs from a 401(k) and 403(b)

A 457(b) is designed for government and nonprofit workers, while a 401(k) is for private employees and a 403(b) is for school and hospital workers. The biggest practical difference is the withdrawal rule: a 457(b) lets you take money out penalty-free once you leave your job, regardless of age. A 401(k) or 403(b) charges a 10 percent penalty if you withdraw before 59½, with narrow exceptions.

Contribution limits are separate. You can max out a 457(b) and a 401(k) in the same year if you have both. You cannot, however, contribute to two 457(b) plans at the same time—the IRS limit applies across all 457(b)s you participate in.

Another difference: 457(b) plans are not required to offer investment choices or employer matching. Some do, but many are bare-bones plans with limited fund options. A 401(k) at a larger employer typically offers dozens of mutual funds and often includes an employer match. Check what your specific plan offers before deciding how much to contribute.

Frequently Asked Questions

Can I withdraw from my 457(b) if I still work for the same employer?

Generally no, unless you face an unforeseeable emergency. You must separate from service (quit, retire, or be laid off) to access your balance without penalty. Some plans allow loans, which is another way to access the money while still employed, but you must repay the loan with interest.

What happens to my 457(b) if I die before I retire?

Your beneficiary—whoever you named on the plan's beneficiary form—inherits the balance. They can take it as a lump sum or roll it into an inherited IRA. The money is still subject to income tax when withdrawn, but there is no penalty. If you did not name a beneficiary, the plan goes through your estate.

Can I contribute to a 457(b) and a 401(k) at the same time?

Yes. If you work for a government employer that offers both, you can contribute the full limit to each plan in the same year. The limits are separate. However, if you have two 457(b) plans (from two employers), the annual limit applies to your combined contributions across both.

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

Yes, beginning at age 73. The IRS requires you to withdraw a calculated amount each year based on your age and account balance. If you do not take the distribution, you face a 25 percent penalty on the amount you should have withdrawn (reduced to 10 percent if you correct it within two years).

What if I need money before age 59½ and I have not left my job?

You can request a withdrawal for an unforeseeable emergency, but the plan administrator must approve it and the definition is strict. If that does not work, some plans allow loans. You borrow against your balance and repay it with interest over time. Check your plan documents to see if loans are available.