How a 457 Plan Works: Contribution Limits, Withdrawals, and Tax Treatment

A 457 plan is a tax-deferred retirement savings account for state and local government employees and certain nonprofit workers

A 457 plan (named after the section of the Internal Revenue Code that created it) lets you set aside money from your paycheck before taxes are taken out, similar to a 401(k). The money grows tax-free until you withdraw it in retirement. Unlike a 401(k), a 457 plan does not require you to reach age 59½ to withdraw funds without penalty — you can withdraw at any age once you separate from your employer, though ordinary income tax still applies.

The plan is available only to employees of state and local governments and certain tax-exempt organizations. Your employer sets up and administers the plan; you do not open one on your own. If your employer offers a 457, you will see it listed alongside other retirement options during enrollment, usually with a summary document that explains the specific investment choices and withdrawal rules your plan allows.

Key Takeaways

• A 457 plan allows you to contribute pre-tax income up to an annual limit set by the IRS, which changes yearly and is separate from 401(k) limits.
• You can withdraw money from a 457 without the 10 percent early withdrawal penalty once you leave your job, though you will owe income tax on the withdrawal.
• A 457 plan belongs to you, not your employer — if you change jobs, your balance moves with you or stays in the plan depending on your employer's rules.
• Some employers offer both a 457 and a 403(b) plan, and you can contribute to both in the same year up to separate limits for each.
• Withdrawals are required to begin by April 1 of the year after you turn 73, following the same timeline as a traditional 401(k).

How contributions and annual limits work

You elect a percentage of your gross pay to go into the 457 plan before federal income tax is calculated. Your employer deducts this amount from each paycheck and deposits it into your account. The IRS sets an annual contribution limit that applies to all 457 plans; this limit changes most years and is indexed to inflation. You can find the current year's limit on the IRS website or in your plan's summary document.

The contribution limit is separate from any 401(k) or 403(b) limit. If your employer offers both a 457 and a 403(b), you can contribute to each plan in the same year, but each has its own ceiling. For example, if the 457 limit is $23,500 and the 403(b) limit is also $23,500, you could theoretically contribute $23,500 to each plan in the same year — though most employees do not have the income to do so.

If you are age 50 or older, you may be able to make an additional "catch-up" contribution to your 457 plan. The catch-up amount is set by the IRS and also changes yearly. Check your plan documents or ask your benefits administrator whether your plan allows catch-up contributions, because not all plans offer them.

Tax treatment: when you pay taxes on 457 withdrawals

Money you contribute to a 457 plan is not subject to federal income tax in the year you contribute it. The money grows tax-free inside the account. When you withdraw it, you pay ordinary income tax on the full amount withdrawn — both your contributions and all the earnings.

This is different from a Roth 401(k) or Roth 403(b), where you contribute after-tax money but withdrawals are tax-free. A traditional 457 works like a traditional 401(k): you get a tax break on the way in, and you pay tax on the way out.

Some employers offer a Roth 457 option, which works the opposite way. You contribute after-tax money, but may have access to withdrawals are tax-free. If your employer offers both a traditional and Roth 457, you can split your contributions between them, though the combined total cannot exceed the annual limit.

Withdrawal rules and the separation-from-service exception

The defining feature of a 457 plan is that you can withdraw money without the 10 percent early withdrawal penalty once you separate from your employer — meaning you leave your job, retire, or are laid off. A 401(k) normally penalizes withdrawals before age 59½; a 457 does not. This makes a 457 valuable for government workers who retire before 59½.

You still owe ordinary income tax on the withdrawal. If you withdraw $50,000 from your 457 at age 55, you will owe income tax on that $50,000 in the year you withdraw it, but you will not owe the additional 10 percent penalty. The tax is calculated based on your total income for that year, so the effective rate depends on your other income and filing status.

Some plans allow you to withdraw money while still employed, but this is less common and depends on your employer's rules. Check your plan documents or ask your benefits administrator whether in-service withdrawals are permitted.

What happens to your 457 when you change jobs

Your 457 balance belongs to you, not your employer. When you leave your job, you have several options for what to do with the money. You can leave it in your current employer's plan if the plan allows it — many do, and you can continue to withdraw from it even after you have moved to a new job. You can roll it over to an Individual Retirement Account (IRA) or to a 457 plan offered by your new employer if you move to another government or nonprofit job.

Rolling over to an IRA is common because it gives you more investment choices and may lower fees. A direct rollover — where the money moves straight from your old plan to the IRA without passing through your hands — avoids tax withholding and complications. If you take a distribution and then deposit it yourself within 60 days, the IRS treats it as a rollover, but your employer will withhold taxes, so you have to come up with that money from another source to deposit the full amount.

You cannot roll a 457 into a 401(k) or 403(b) — the rules do not allow it. You can roll it into another 457 or into an IRA. If you cash out the plan instead of rolling it over, the full amount is taxable in that year.

Required minimum distributions at age 73

Once you turn 73, you must begin withdrawing money from your 457 plan. The IRS calls these required minimum distributions (RMDs). The amount you must withdraw each year is calculated using a formula based on your age and your account balance. Your plan administrator will calculate this for you and notify you of the amount due.

If you do not take the required distribution, you owe a penalty equal to 25 percent of the amount you failed to withdraw (or 10 percent if you correct it within two years). This is a steep penalty, so it is important to track the deadline. RMDs must begin by April 1 of the year after you turn 73, and then annually by December 31.

If you are still working at age 73 and your employer's plan allows it, some plans permit you to delay RMDs until you actually retire. This is called the "still-working exception." Not all plans offer it, so check your plan documents.

457 plans versus 401(k) and 403(b) plans

A 457 plan is designed for government and nonprofit employees, while a 401(k) is for private-sector employees and a 403(b) is for nonprofit and education employees. The main practical difference is the withdrawal rule: a 457 has no early withdrawal penalty once you separate from service, while a 401(k) and 403(b) penalize withdrawals before age 59½.

Contribution limits are separate for each plan type. If you work for a nonprofit that offers both a 457 and a 403(b), you can contribute to both in the same year, each up to its own limit. If you work for a government employer that offers a 457 and also have a side job with a 401(k), the limits are separate as well.

Investment choices vary by plan. A 457 typically offers mutual funds, target-date funds, and sometimes a stable value option. A 401(k) often has more choices and lower fees because of larger plan size. A 403(b) traditionally offered annuities but increasingly offers mutual fund options similar to a 401(k).

Frequently Asked Questions

Can I withdraw from my 457 before I leave my job?

Most 457 plans do not allow in-service withdrawals, but some do. Check your plan's summary document or ask your benefits administrator. If your plan does allow them, you may face restrictions — for example, some plans only allow withdrawals after you reach a certain age or after a set number of years of participation.

What happens to my 457 if I die before retirement?

Your beneficiary — the person you named on your plan documents — inherits the balance. They can roll it into an IRA in their own name or take distributions according to the plan's rules. If you have not named a beneficiary, the plan goes through your estate, which is slower and more complicated.

Can I borrow from my 457 plan?

Some 457 plans allow loans, but many do not. If your plan does, you typically can borrow up to 50 percent of your balance, up to a maximum amount set by the IRS. You repay the loan through payroll deductions. If you leave your job before the loan is repaid, you usually must repay it immediately or it becomes a taxable withdrawal.

Is there a difference between a 457(b) and a 457(f) plan?

A 457(b) is the standard plan for government employees and most nonprofits. A 457(f) is a nonqualified plan for highly paid executives at certain nonprofits. A 457(f) has different rules and is much less common. If you are unsure which type your employer offers, check your plan documents or ask your benefits administrator.

Can I contribute to both a 457 and a traditional IRA in the same year?

Yes. The contribution limits are separate. However, your ability to deduct traditional IRA contributions may be limited if you are covered by a 457 plan and your income exceeds certain thresholds. Consult a tax professional or the IRS website for the current income limits in your filing status.