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

By Felix Thorpe · Retirement Accounts WriterPublished October 8, 2026

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

A 457(b) plan lets you set aside money from your paycheck before taxes are taken out, reducing your taxable income in the year you contribute. The money grows tax-free until you withdraw it, usually in retirement. Unlike a 401(k), a 457(b) is not tied to Social Security or Medicare taxes—only income tax is deferred.

The plan is named after Section 457 of the Internal Revenue Code. It exists specifically for workers at government agencies, public schools, universities, and tax-exempt nonprofits that do not offer a 401(k). Your employer sets up the plan and chooses the investment options available to you.

The most important difference from a 401(k): a 457(b) has its own contribution limit, separate from any 401(k) or 403(b) you might have elsewhere. This means you could potentially save in both plans in the same year without one reducing the other's limit.

Key Takeaways

A 457(b) contributions reduce your federal income tax in the year you contribute, but not your Social Security or Medicare taxes.
The annual contribution limit is set by the IRS each year and applies only to 457(b) plans—it does not reduce your 401(k) or 403(b) limit if you have one of those elsewhere.
You can withdraw money from a 457(b) without penalty once you separate from your employer, regardless of age, which differs from 401(k) rules.
If you leave your job, you must decide whether to roll the balance to an IRA, leave it in the plan, or take a lump-sum distribution.
Some 457(b) plans offer a Roth option, which lets you pay tax now and withdraw earnings tax-free later.

How contributions and tax treatment work

You authorize your employer to deduct a dollar amount or percentage from each paycheck and deposit it into your 457(b) account. That money does not appear on your federal income tax return as taxable wages—it reduces your adjusted gross income (AGI). This lowers your federal income tax bill for that year.

However, 457(b) contributions are still subject to Social Security and Medicare taxes (FICA). If you earn $60,000 and contribute $10,000 to a 457(b), you pay income tax on $50,000, but you still pay FICA on the full $60,000. This is different from a 401(k), where contributions avoid both income tax and FICA.

The money inside the account grows without annual tax on the gains. You do not report interest, dividends, or capital gains each year. Tax is deferred until you withdraw the money, at which point withdrawals are taxed as ordinary income.

Annual contribution limits and catch-up rules

The IRS sets the standard contribution limit each year. In 2024, the limit is $23,500 for employees under age 50. The limit changes annually to account for inflation, so check your plan's summary or your employer's benefits website for the current year.

If you are age 50 or older, you can contribute an additional catch-up amount. In 2024, the catch-up is $7,500, bringing the total to $31,000. This applies only in the year you turn 50 and beyond.

Some 457(b) plans offer a special catch-up rule in the final three years before your normal retirement age (usually defined in your plan). This rule allows you to contribute up to twice the standard limit in those years, but only if you did not use the age-50 catch-up in prior years. Your plan administrator can tell you whether this option is available and when your catch-up window begins.

Withdrawal rules and the separation-from-service advantage

The most significant feature of a 457(b) is that you can withdraw money without penalty once you separate from service—meaning you leave your job—at any age. A 401(k) normally penalizes withdrawals before age 59½, but a 457(b) does not. If you retire at 55, you can access your 457(b) without a 10% early-withdrawal penalty.

You do pay ordinary income tax on the withdrawal. If you contributed $100,000 over your career and it grew to $150,000, you withdraw the full $150,000 but pay income tax on all of it (since your contributions were pre-tax). The tax is due in the year you withdraw.

You must begin taking required minimum distributions (RMDs) at age 73, based on IRS life-expectancy tables and your account balance. Your plan will calculate the amount and notify you. If you do not take the RMD, you owe a 25% penalty on the shortfall (reduced to 10% if corrected within two years).

Rolling over or leaving money in the plan after you leave your job

When you separate from service, you have several options. You can roll the balance into a traditional IRA, which continues the tax deferral and gives you more investment choices than the employer plan usually offers. The rollover is not taxable—the money moves directly from the 457(b) trustee to the IRA trustee.

You can also leave the money in the 457(b) plan if your employer allows it. Some plans permit former employees to keep their accounts open and continue investing. This can be useful if the plan has low fees or if you want to delay RMDs (some plans allow you to postpone RMDs if you are still working elsewhere).

A third option is to take a lump-sum distribution—withdraw the entire balance at once. This is taxable in full in the year you withdraw, which can push you into a higher tax bracket. Most people avoid this unless they need the cash immediately.

You cannot roll a 457(b) into a 401(k) or 403(b). The IRS treats 457(b) rollovers as separate from other retirement plans. If you move to a new employer that offers a 457(b), you may be able to roll your old balance into the new plan, but only if the new plan accepts rollovers—not all do.

Roth 457(b) option and tax planning

Many 457(b) plans now offer a Roth 457(b) option alongside the traditional pre-tax version. With Roth contributions, you pay income tax on the money when you contribute it, but withdrawals in retirement are tax-free (including all the growth). This is useful if you expect to be in a higher tax bracket later or if you want tax-free income in retirement.

You can split your contributions between traditional and Roth in the same year. If you contribute $10,000 total, you might put $6,000 in traditional (reducing your current taxable income) and $4,000 in Roth (paying tax now). Both amounts count toward the same annual limit—they do not add together.

Unlike a traditional 457(b), a Roth 457(b) does not require RMDs during your lifetime. You can leave the money untouched as long as you want. However, your beneficiaries will inherit RMD obligations if they do not roll the account to an inherited IRA.

How a 457(b) fits into your overall retirement picture

If your employer offers a 457(b), it is usually your primary retirement savings vehicle at that job. However, you might also have a spouse with a 401(k), or you might have a side business with a Solo 401(k) or SEP IRA. The 457(b) limit is independent—it does not reduce your ability to contribute to other plans.

Many government and nonprofit workers also receive a pension. A 457(b) is supplemental to that pension, not a replacement. The combination of a pension plus a 457(b) can provide substantial retirement income. Check your pension summary to understand your vesting schedule and projected benefit, then use the 457(b) to save additional amounts.

If you are self-employed or have freelance income outside your main job, you can also open a Solo 401(k) or SEP IRA for that income. These plans have their own limits and do not interfere with your 457(b) contributions.

Frequently Asked Questions

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

Most 457(b) plans do not allow in-service withdrawals before age 59½, and some do not allow them at all. A few plans permit hardship withdrawals for immediate and heavy financial need (medical bills, eviction, foreclosure), but the definition is strict and requires documentation. Contact your plan administrator to learn what your specific plan allows.

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

Your designated beneficiary receives the balance. If you named a spouse, they can roll it into their own IRA and continue deferring taxes. Non-spouse beneficiaries must withdraw the balance within ten years under current rules, though they can spread withdrawals across those years to manage the tax impact.

Can I borrow from my 457(b)?

Some plans allow loans, but not all. If your plan permits it, you typically can borrow up to 50% of your vested balance, with a repayment period of five years (longer if the loan is for a home purchase). Loan interest is not tax-deductible. Check your plan document or contact your administrator to see if loans are available.

Do I have to take my 457(b) as an annuity, or can I take a lump sum?

That depends on your plan. Some plans require annuity payments (monthly income for life), while others allow lump-sum withdrawals or a mix of both. A few plans offer systematic withdrawals over a set period. Review your plan's distribution options or ask your administrator what choices you have.

If I move to a new government job, can I transfer my old 457(b) to the new one?

Only if the new employer's plan accepts rollovers from other 457(b) plans. Not all plans do. If the new plan does not accept rollovers, you must roll the old balance to a traditional IRA. Ask the new employer's benefits office before you start whether they accept 457(b) rollovers.