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

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, so the contribution reduces your taxable income for that year. The money grows tax-free inside the account until you withdraw it, usually in retirement. The plan is named after Section 457 of the Internal Revenue Code, which created it specifically for public-sector and nonprofit workers who don't have access to a 401(k).

The key difference from a 401(k) is that a 457(b) is not a may have access to plan under ERISA (the Employee Retirement Income Security Act). That changes some rules about loans, hardship withdrawals, and what happens if you leave your job. Your employer controls the plan design, so the exact features—whether loans are allowed, what investment options exist, whether your employer matches contributions—depend on your specific employer's plan document.

If your employer offers a 457(b), you'll enroll through your human resources or benefits department, usually during open enrollment or when you're hired. You choose a contribution amount, and that money comes out of your paycheck before federal income tax is calculated.

Key Takeaways

• A 457(b) reduces your current taxable income by the amount you contribute, lowering your federal income tax bill in the year you save.
• The contribution limit for 2024 is $23,500 per year (this amount changes annually), and you can contribute more if you're age 50 or older under catch-up rules.
• Money withdrawn before age 59½ is generally subject to income tax and a 10 percent early withdrawal penalty, with limited exceptions for government 457(b) plans.
• Unlike a 401(k), a 457(b) has no loan provision in most cases, and funds do not roll into your personal IRA automatically if you leave your job.
• Your employer may or may not match contributions—check your plan document to see if matching is offered.

Who Can Open a 457(b) and Where

A 457(b) is available only through your employer; you cannot open one on your own. Your employer must be a state or local government agency, a political subdivision, or an may be able to access nonprofit organization. This includes city and county workers, state employees, teachers, police officers, firefighters, and staff at certain tax-exempt nonprofits.

If you work for a private company, a federal agency, or a nonprofit that is not on the IRS list of may be able to access organizations, your employer will not offer a 457(b). In those cases, you may have access to a 401(k), a 403(b) (if you work at a school or hospital), or a SIMPLE IRA instead.

When you're hired or during your employer's open enrollment period, your benefits office will tell you whether a 457(b) is available. If it is, you'll receive a summary plan description that explains the contribution limits, investment options, withdrawal rules, and any employer match.

Contribution Limits and Catch-Up Rules

The annual contribution limit for a 457(b) is set by the IRS and changes each year. For 2024, the limit is $23,500. This is the total amount you can contribute across all 457(b) plans you may participate in (though most people have access to only one). The limit applies to employee deferrals only; if your employer makes a matching contribution, that counts separately toward a combined employer-employee limit.

If you are age 50 or older, you can make an additional catch-up contribution of up to $7,500 per year, bringing your total to $31,000 for 2024. This catch-up is available only in the year you turn 50 and in all years after.

Some 457(b) plans also allow a special catch-up in the final three years before your normal retirement age under the plan. This lets you contribute up to twice the annual limit (without the age-50 catch-up) in those years. Check your plan document or ask your benefits office whether this option is available in your plan.

Tax Treatment: When You Pay Tax on Your Savings

Money you contribute to a 457(b) is deducted from your gross pay before federal income tax is calculated, so it lowers your taxable income in the year you contribute. If you earn $60,000 and contribute $10,000 to your 457(b), your taxable income for that year is $50,000. This means you pay federal income tax on only $50,000.

The money inside the account grows tax-free. If you invest in mutual funds or other securities, any gains, dividends, or interest earned inside the account are not taxed until you withdraw the money. This tax-free growth is one of the main reasons to use a 457(b) instead of saving in a regular taxable account.

When you withdraw money in retirement, the full amount you withdraw—both your contributions and all the growth—is taxed as ordinary income 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 that year and taxed at your ordinary income tax rate.

Withdrawal Rules and Early Withdrawal Penalties

You can withdraw money from your 457(b) without penalty once you reach age 59½, retire, or experience an unforeseeable emergency as defined by the IRS. If you withdraw before age 59½ for any other reason, you owe income tax on the withdrawal plus a 10 percent early withdrawal penalty.

An unforeseeable emergency is a severe financial hardship caused by illness, accident, casualty loss, or other circumstances beyond your control. The IRS does not define this broadly; ordinary expenses like a car payment or vacation do not may have access to. Your plan administrator decides whether your situation meets the definition, and you must exhaust other resources before the plan will allow a withdrawal.

Government 457(b) plans have a special rule: if you leave your job, you can withdraw your balance without the 10 percent penalty, even if you're under 59½. You still owe income tax on the withdrawal, but not the penalty. This is different from a 401(k), where leaving your job does not automatically waive the early withdrawal penalty.

You must begin taking withdrawals by April 1 of the year after you turn 73 (this age changed under the SECURE 2.0 Act). The IRS calculates a minimum amount you must withdraw each year based on your age and account balance. If you don't withdraw enough, you owe a 25 percent penalty on the shortfall (reduced to 10 percent if you correct it within two years).

What Happens to Your 457(b) When You Leave Your Job

If you leave your job, your 457(b) balance stays in the plan unless you choose to move it. You have several options: leave it where it is, withdraw it, or roll it into another retirement account. The rules depend on whether your employer is a government agency or a nonprofit.

If you work for a government employer, you can roll your 457(b) balance into an IRA (either traditional or Roth) or into a 401(k) or 403(b) at a new employer, if that plan accepts rollovers. You can also leave the money in your former employer's 457(b) plan and take withdrawals later. Rolling into an IRA gives you more investment choices, but leaving it in the 457(b) preserves the special early withdrawal rule: you can withdraw without the 10 percent penalty if you've separated from service, even before 59½.

If you work for a nonprofit, the rules are stricter. You generally cannot roll a nonprofit 457(b) into an IRA. Your options are to leave the money in the plan, roll it into another 457(b) at a different nonprofit employer, or withdraw it. Before you leave a nonprofit job, ask your benefits office what rollover options are available.

Employer Matching and Plan Features

Some government and nonprofit employers offer a matching contribution—they add money to your 457(b) based on how much you contribute. A common match is 50 percent of the first 6 percent you contribute, meaning if you contribute 6 percent of your salary, your employer adds 3 percent. The exact match formula varies by employer.

Matching contributions are optional; your employer decides whether to offer them and on what terms. Check your plan document or ask your benefits office whether your employer matches. If they do, contributing enough to get the full match is usually a good financial move, because it's immediate return on your money.

Some 457(b) plans allow loans, but many do not. If loans are available, you can typically borrow up to 50 percent of your vested balance (or $50,000, whichever is less) and repay it over five years. Loans are not available in all plans, so check your summary plan description. Unlike a 401(k), a 457(b) loan is not a standard feature.

Frequently Asked Questions

Can I have both a 457(b) and a 401(k) or 403(b)?

Yes, but your combined contributions to all three plans cannot exceed the annual limit. If you contribute $15,000 to a 457(b) and $10,000 to a 403(b), you've used $25,000 of your $23,500 limit for 2024, which exceeds the cap. You would need to reduce contributions to one or both plans. The limits are separate for catch-up contributions if you're age 50 or older.

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

Your beneficiary receives the balance in your account. The money is paid out according to the plan's beneficiary rules, which are in your summary plan description. Your beneficiary will owe income tax on withdrawals, but the 10 percent early withdrawal penalty does not apply to beneficiary distributions.

Can I convert my 457(b) to a Roth IRA?

If your 457(b) is with a government employer, you can roll it into a Roth IRA, and the amount you roll over will be taxed as income in that year. If your 457(b) is with a nonprofit, you generally cannot roll into a Roth IRA. Ask your plan administrator what rollover options are available under your specific plan.

Do I have to take withdrawals 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 age and account balance. If you're still working and your plan allows it, you may be able to delay distributions until you actually retire.

Is my 457(b) protected if my employer goes bankrupt?

Government 457(b) plans are generally protected because they are held in trust and kept separate from the employer's assets. Nonprofit 457(b) plans have less protection; the funds are not required to be held in trust, so there is some risk if the nonprofit faces financial trouble. Check your plan document to see how your funds are held and protected.