How a 457(b) Plan Works: Tax-Deferred Savings for Government and Nonprofit Workers

A 457(b) plan is a tax-deferred retirement savings account offered by state and local government employers and certain nonprofit organizations

Unlike a 401(k), which is common in the private sector, a 457(b) is designed specifically for public employees and workers at tax-exempt organizations. You contribute money before taxes are taken out, the account grows tax-free, and you pay income tax only when you withdraw the money in retirement. The account belongs to you — your employer does not own it, and you keep it if you change jobs.

The main appeal is the contribution limit. For 2024, you can set aside up to $23,500 per year in a 457(b), the same as a 401(k). If you are within three years of your plan's normal retirement age, you may be able to contribute an additional $23,500 in a single year (called a catch-up contribution), doubling your annual limit to $47,000. This makes a 457(b) one of the most powerful tax-deferred savings tools available to public employees.

Key Takeaways

• A 457(b) is offered only by state and local government employers and certain nonprofits, not by private companies.
• You can contribute up to $23,500 per year (as of 2024), with an additional $23,500 possible in your final three years before retirement.
• Money grows tax-free inside the account, and you pay income tax only when you withdraw it.
• You can withdraw money without penalty once you separate from your employer, regardless of age — unlike a 401(k), which typically charges a 10% penalty if you withdraw before 59½.
• Your employer may or may not match contributions; this varies by plan and employer.

How contributions and withdrawals work differently than a 401(k)

The most important difference between a 457(b) and a 401(k) is the withdrawal rule. With a 401(k), if you take money out before age 59½, you owe a 10% early withdrawal penalty plus income tax. With a 457(b), you can withdraw your money without penalty once you leave your job, even if you are 35 years old. This makes a 457(b) much more flexible if you plan to retire early or change careers.

However, there is a catch: the money must stay in the account until you actually separate from your employer. You cannot take a loan against a 457(b) the way you can with many 401(k) plans, and you cannot withdraw money while still employed just because you want to. Once you leave, the account is yours to use as you wish.

Contributions come directly from your paycheck before income tax is calculated, which lowers your taxable income for the year. If you contribute $10,000 to your 457(b), your employer reports your income as $10,000 less than what you actually earned, so you pay less federal and state income tax that year.

Employer matching and vesting

Some government and nonprofit employers offer matching contributions — they add money to your account based on how much you contribute. A common match is 50% of the first 6% you contribute, meaning if you put in 6% of your salary, your employer adds 3%. Not all 457(b) plans include a match, so check your plan documents or ask your benefits administrator what your employer offers.

Matching money is usually subject to a vesting schedule, which means you do not own it immediately. A typical schedule might require you to work for three years before the match is fully yours. If you leave after one year, you might forfeit half the matching contributions your employer made. Your own contributions, however, are always 100% vested — they belong to you from day one, regardless of how long you stay.

Investment options and account growth

Your 457(b) plan offers a menu of investment choices — usually mutual funds, target-date funds, stable value funds, and sometimes individual stocks or bonds. You choose how to invest your contributions, and the account grows tax-free. If your investments earn $5,000 in gains one year, you pay no tax on that $5,000 while it sits in the account. You only pay tax when you withdraw the money.

The investment options available depend on your specific plan. A large city or state may offer 20 or more choices; a smaller employer might offer only five. Your plan documents or the investment provider's website will show the full list, along with expense ratios (the annual cost to own each fund) and historical performance.

Tax treatment when you retire and start withdrawals

When you withdraw money from your 457(b) in retirement, the entire withdrawal is taxed as ordinary income in the year you take it. If you withdraw $50,000 in a single year, that $50,000 is added to your other income (Social Security, part-time work, investment income) and taxed at your marginal rate. This can push you into a higher tax bracket if you withdraw too much in one year.

You must begin taking withdrawals by April 1 of the year after you turn 73 (this age changed from 72 in 2023 under the SECURE 2.0 Act). The IRS calculates a minimum withdrawal amount each year based on your account balance and life expectancy. If you do not take the minimum, you owe a 25% penalty on the shortfall (reduced to 10% if you correct it within two years).

Some plans allow you to take withdrawals in installments over time, which can spread the tax burden across multiple years. Others require a lump sum. Check your plan's withdrawal rules before you retire so you can plan your tax strategy.

Rollovers and moving your money

If you leave your job, you can roll your 457(b) balance into an Individual Retirement Account (IRA) or into a 457(b) plan offered by a new government employer. A rollover means the money moves directly from one account to another without you touching it, so no taxes are withheld and no penalties apply.

You can also roll a 457(b) into a 401(k) or 403(b) if your new employer offers one, though some plans do not accept 457(b) rollovers. Before you change jobs, ask your new employer's benefits team whether they accept incoming rollovers. If they do not, rolling into an IRA is usually your best option.

If you withdraw the money directly (rather than rolling it over), your employer will withhold 20% for federal income tax, and you will owe the full tax bill when you file your return. Rollovers avoid this withholding and keep the money growing tax-free.

Comparing a 457(b) to other retirement accounts

If your employer offers both a 457(b) and a 403(b) (common at nonprofits and some government agencies), you can contribute to both in the same year, up to a combined limit. For 2024, the combined limit is $23,500 across both accounts. You cannot exceed this total, even if you max out each plan separately.

A 457(b) is more flexible than a 401(k) because you can withdraw without penalty once you leave your job. It is more powerful than an IRA because the contribution limit is much higher ($23,500 versus $7,000 for an IRA in 2024). If you are a government or nonprofit employee, maxing out your 457(b) before saving in an IRA usually makes sense.

The main trade-off is that a 457(b) is only available through your employer — you cannot open one on your own. If you leave a job with a 457(b) and move to a private company, you lose access to this account type and must rely on your new employer's 401(k) or your own IRA.

Frequently Asked Questions

Can I withdraw money from my 457(b) before I leave my job?

No, not for general spending. Money stays locked in the account until you separate from your employer. Some plans allow loans or hardship withdrawals in rare cases (serious illness, home purchase), but these are exceptions. Check your specific plan documents to see if either option is available.

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

The account passes to your beneficiary — usually your spouse or children, depending on who you named when you enrolled. Your beneficiary can roll the account into their own IRA or take withdrawals over time. The money is not lost; it becomes part of your estate.

Do I have to take money out of my 457(b) at a certain age?

Yes, you must begin taking required minimum distributions by April 1 of the year after you turn 73. The amount is calculated by the IRS based on your account balance and life expectancy. If you do not take the minimum, you owe a 25% penalty on the amount you should have withdrawn.

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

Only if you work for two different employers — one offering a 457(b) and one offering a 401(k). If so, you can contribute the full limit to each account in the same year. However, most people work for one employer, so this situation is uncommon.

What if my employer goes out of business or the plan is terminated?

Your money is protected. A 457(b) is held in trust by your employer or a third-party custodian, separate from the employer's general assets. If the employer faces financial trouble, your account cannot be seized to pay the employer's debts. You will be notified if the plan is terminated and given options to roll the money to an IRA or another plan.