How a 457 Plan Works: Deferred Compensation for Government and Nonprofit Workers

A 457 plan is a tax-deferred retirement savings account for employees of state and local governments and certain nonprofit organizations

A 457 plan (named after the section of the Internal Revenue Code that created it) lets you set aside part of your paycheck before taxes are taken out. The money grows tax-free until you withdraw it, usually in retirement. Unlike a 401(k), which is common in the private sector, a 457 plan is designed specifically for public employees and workers at tax-exempt nonprofits.

The account belongs to you, not your employer. Your employer simply deducts your contributions from your paycheck and sends them to the plan's custodian. You choose how the money is invested from the options your plan offers—typically mutual funds or stable value funds. When you leave your job or reach retirement, you can take the money out, and that is when you pay income tax on it.

Two main types exist: the governmental 457(b) plan, which is what most state and local government workers use, and the nongovernmental 457(b) plan, which some nonprofits offer. The rules differ slightly between them, particularly around what happens to your money if your employer faces financial trouble.

Key Takeaways

• A 457 plan lets you contribute pre-tax dollars from your paycheck, and the money grows tax-deferred until withdrawal.
• Contribution limits for 2024 are set by the IRS and apply across all your 457 plans combined, separate from 401(k) or 403(b) limits.
• You can withdraw money from a 457 plan without the 10% early withdrawal penalty that applies to most retirement accounts before age 59½.
• In a governmental 457 plan, your money is held in a trust and protected if your employer goes bankrupt; in a nongovernmental plan, it is not.
• Rollovers from a 457 plan to an IRA or another retirement account follow specific rules that depend on the type of plan and your employment status.

Contribution Limits and How Much You Can Save

The IRS sets an annual limit on how much you can contribute to a 457 plan. For 2024, that limit is $23,500 per year (the IRS adjusts this amount annually for inflation). This limit applies to the total of all 457 plans you participate in—if you work two jobs and both offer a 457, your combined contributions across both cannot exceed the annual limit.

The 457 limit is separate from limits on other retirement accounts. If you also have a 401(k) or 403(b) through another job, those have their own limits. You can max out a 457 and a 403(b) in the same year, for example, because they are different account types.

If you are age 50 or older, you can make an additional catch-up contribution of $7,500 per year, bringing your total to $31,000. This catch-up is available only in the year you turn 50 and beyond. Some plans also offer a special catch-up for employees in their final three years before retirement, allowing contributions up to the amount you did not contribute in prior years (up to a lifetime maximum), but not all plans offer this feature—check your plan documents.

Tax Treatment: When You Pay Taxes on Your Money

Money you contribute to a 457 plan reduces your taxable income for the year you contribute it. If you earn $60,000 and contribute $10,000 to your 457, you report only $50,000 as income on your tax return that year. You do not pay federal income tax on the $10,000 or on any investment growth until you withdraw the money.

When you withdraw funds—whether at retirement, after leaving your job, or at any other time—the full amount you withdraw is taxed as ordinary income in the year you take it out. If you withdraw $50,000 in a single year, that $50,000 is added to your other income for that year and taxed accordingly. This is different from a Roth account, where withdrawals are tax-free.

You do not have to wait until age 59½ to withdraw money from a 457 plan without penalty, which is a major advantage over 401(k)s and IRAs. You can withdraw at any age once you separate from service (leave your job) or reach age 59½. Some plans also allow withdrawals for an unforeseeable emergency, though the definition is strict and the approval process varies by plan.

Withdrawal Rules and When You Can Access Your Money

The timing of withdrawals depends on your employment status and the type of plan. In a governmental 457 plan, you can withdraw money without penalty once you separate from service (leave your job) at any age, or once you reach age 59½ while still employed. You do not have to wait until retirement.

In a nongovernmental 457 plan, the rules are stricter. You can withdraw without penalty only when you separate from service or reach age 59½. If you leave your job before 59½, you can withdraw, but if you are rehired by the same employer within two years, the IRS may treat the withdrawal as a loan that you must repay.

Required minimum distributions (RMDs) begin at age 73 for both types of plans (this age changed under the SECURE 2.0 Act). You must withdraw a calculated amount each year based on your age and account balance. If you are still working and your plan allows, you may be able to delay RMDs until you actually retire, but this depends on your specific plan.

Governmental Versus Nongovernmental Plans: The Key Difference

The main practical difference between these two types concerns what happens to your money if your employer faces serious financial trouble. In a governmental 457 plan, your contributions and earnings are held in a trust that is separate from your employer's assets. If your employer declares bankruptcy, your 457 money is protected and remains yours. This is the safer structure.

In a nongovernmental 457 plan (offered by some nonprofits), your money is not held in a trust. It remains an asset of the employer organization. If the nonprofit faces financial difficulty, creditors could potentially claim the funds. This is a real risk, though it is uncommon. If you work for a nonprofit offering a 457, ask whether it is a governmental or nongovernmental plan and understand this distinction.

Both types have the same contribution limits and tax treatment. The difference is purely about creditor protection. If you have a choice between plans, the governmental structure offers more security.

Rollovers and Moving Money to Another Account

You can move money from a 457 plan to another retirement account, but the rules are specific. A direct rollover (where the money moves directly from one custodian to another without passing through your hands) is the cleanest option and avoids immediate tax consequences.

From a governmental 457 plan, you can roll over to a traditional IRA, a Roth IRA, a 401(k), or another 457 plan. The money keeps its tax-deferred status. If you roll to a Roth IRA, you will owe taxes on the amount converted, but future withdrawals from the Roth will be tax-free.

From a nongovernmental 457 plan, rollovers are more limited. You can roll over to another nongovernmental 457 plan or to an IRA, but not directly to a 401(k) or 403(b). If you receive the money as a check (an indirect rollover) instead of a direct transfer, you have 60 days to deposit it into another account, or the full amount becomes taxable income immediately.

Rollovers are optional. You can also simply withdraw the money and pay taxes on it, though this is usually less tax-efficient. Talk to a tax professional before rolling over a large balance, because the rules interact with your other income and retirement accounts in ways that affect your tax bill.

How a 457 Plan Fits Into Your Overall Retirement Strategy

A 457 plan is one piece of retirement savings, not the whole picture. Most government and nonprofit employees also have access to a pension (a defined benefit plan that pays you a set amount each month in retirement). If you have a pension, your 457 contributions are extra savings on top of that may provide income.

The 457 is useful for catching up if you did not save enough early in your career, because the contribution limits are high and you can access the money without penalty before age 59½. It is also useful if you plan to retire before 59½, because you can withdraw without the 10% penalty that would apply to an IRA or 401(k).

If you are self-employed or work for a private employer, you cannot use a 457 plan. You would use a Solo 401(k), SEP IRA, or Solo Roth instead. If you work for a nonprofit that does not offer a 457, you may have access to a 403(b) plan, which has similar rules but slightly different contribution limits and investment options.

Frequently Asked Questions

Can I withdraw from my 457 plan if I still work for my employer?

In a governmental 457 plan, yes—once you reach age 59½, you can withdraw without penalty while still employed. Before age 59½, you generally cannot withdraw unless you separate from service or the plan allows withdrawals for an unforeseeable emergency. In a nongovernmental plan, the rules are stricter and you typically must separate from service to withdraw.

What happens to my 457 if I change jobs?

Your 457 money stays in the account and continues to grow. You can leave it there, roll it over to an IRA or another retirement account (if the rules allow), or withdraw it. If you withdraw before age 59½ from a governmental plan, there is no 10% penalty, but you will owe income tax on the amount. Check with your plan administrator about your specific options.

Can I have both a 457 plan and a 401(k)?

Yes. The contribution limits are separate, so you can max out both in the same year. However, if you have two 457 plans (from two employers), the combined contributions cannot exceed the annual limit. Most people do not have this situation, but it is worth knowing if you work multiple jobs.

Is a 457 plan the same as a 403(b)?

No. Both are tax-deferred accounts for nonprofit and government workers, but they have different contribution limits, investment options, and withdrawal rules. A 403(b) is more common at schools and universities. A 457 is used by government agencies and some nonprofits. They are separate accounts with separate limits.

What if my employer offers a 457 but I also have a pension?

The pension and 457 are separate. Your pension provides may provide income in retirement based on your years of service and salary. The 457 is additional savings you control. Many government employees use both: the pension covers basic living expenses and the 457 provides extra retirement income or flexibility to retire early.