How a 457 Deferred Compensation Plan Works

A 457 plan lets you set aside money from your paycheck before taxes, with the money growing tax-free until you withdraw it in retirement

A 457 deferred compensation plan is an employer-sponsored retirement savings account available to state and local government employees and certain nonprofit workers. You contribute a portion of your salary, which reduces your taxable income for the year. The money sits in the account, grows without being taxed on the gains, and you pay income tax only when you withdraw it — typically after you leave your job or reach retirement age.

The account is "deferred" because you are deferring (postponing) taxes on both the money you contribute and the investment earnings until later. It is "nonqualified," meaning it does not follow the same rules as a 401(k) or IRA. That difference matters: a 457 has its own contribution limits, withdrawal rules, and tax treatment that you need to understand to use it effectively.

Key Takeaways

• You contribute pre-tax dollars directly from your paycheck, and the contributions reduce your taxable income in the year you make them.
• A 457 plan has its own annual contribution limit, separate from any 401(k) or 403(b) limit you may have at another job.
• You can withdraw money from a 457 without the 10 percent early withdrawal penalty that applies to IRAs and 401(k)s, as long as you have separated from your employer or reached the plan's distribution age.
• Unlike a 401(k), a 457 plan does not allow loans, and the money in the account belongs to your employer until you withdraw it — meaning it is at risk if your employer faces financial trouble.
• If you have both a 457 and a 401(k) or 403(b), you can contribute the maximum to each plan in the same year because they have separate limits.

Who can open a 457 plan

A 457 plan is offered only by state and local government employers and certain tax-exempt nonprofit organizations. Your employer must set up and sponsor the plan; you cannot open one on your own. If your employer offers a 457, you will see it listed in your benefits materials or payroll system, often alongside other retirement options like a 403(b) or a government 401(k).

Not all government or nonprofit employers offer a 457. Some offer only a 403(b), some offer both, and some offer neither. Check your employee handbook or ask your human resources department whether a 457 is available to you. If it is, you can enroll during your employer's open enrollment period or when you first become may be able to access, which is usually when you are hired.

Annual contribution limits and catch-up contributions

The IRS sets an annual limit on how much you can contribute to a 457 plan. This limit changes each year and applies only to that calendar year. For 2024, the limit is $23,500 (this figure varies by year, so check your plan documents or the IRS website for the current year). You can contribute up to that amount across all your 457 accounts combined, even if you work for multiple employers.

If you are age 50 or older, you can make an additional catch-up contribution of $7,500 in the same year, bringing your total to $31,000. This is separate from any catch-up contributions you make to a 401(k) or 403(b) at another job. A 457 also has a special catch-up rule: in the three years before you are scheduled to leave your job (or reach your plan's normal retirement age), you can contribute up to twice the annual limit, as long as you did not use the catch-up in earlier years. This allows you to save more aggressively near the end of your career.

How contributions and taxes work

When you enroll in a 457, you choose a percentage of your salary to contribute each pay period. That amount is deducted from your gross pay before federal income tax is calculated, which lowers your taxable income for the year. If you earn $60,000 and contribute $10,000 to your 457, your taxable income for federal purposes is $50,000.

The money you contribute is invested according to the investment options your plan offers — typically mutual funds, stable value funds, or a self-directed brokerage account. Any gains (dividends, interest, or capital appreciation) are not taxed while the money sits in the account. You pay income tax on the full amount — contributions plus all earnings — only when you withdraw the money.

Social Security and Medicare taxes (FICA taxes) are still owed on your salary, even though you contributed to the 457. Only federal income tax is deferred. State and local income taxes may also be deferred, depending on your state's rules.

Withdrawal rules and the separation-from-service trigger

The main rule for 457 withdrawals is straightforward: you can withdraw money without penalty only after you have separated from service with your employer. "Separation from service" means you have left your job — you retired, resigned, or were laid off. You do not have to wait until age 59½, as you would with a 401(k) or IRA. You can withdraw at any age once you have separated.

Some 457 plans also allow withdrawals at a plan-specified retirement age (often 59½ or 62) even if you are still employed. Check your plan's summary plan description to see whether this option is available. A few plans allow hardship withdrawals for immediate and heavy financial need, but this is uncommon and the rules are strict.

When you separate from your employer, you must decide what to do with the money. You can leave it in the plan (if the plan allows), withdraw it as a lump sum, take periodic distributions, or roll it over to an IRA or another employer's plan. If you roll it to an IRA, the money continues to grow tax-free. If you withdraw it, you owe income tax on the full amount in the year you withdraw it.

The difference between a 457 and a 401(k)

A 457 and a 401(k) look similar on the surface — both are employer plans, both use pre-tax contributions, and both defer taxes until withdrawal. But they have important differences. A 401(k) allows loans; a 457 does not. If you need cash, you can borrow from a 401(k) and repay it with interest. A 457 offers no loan option.

A 457 also has a different tax treatment if you die before withdrawing the money. The beneficiary you name receives the balance, but it is subject to income tax in the year received (or spread over a period, depending on the plan). A 401(k) beneficiary also owes tax, but the rules are different and often more flexible.

The biggest practical difference: a 457 is not protected by the same creditor safeguards as a 401(k). The money in a 457 belongs to your employer until you withdraw it, which means it could be at risk if your employer faces bankruptcy or financial crisis. A 401(k) is held in trust for you and is protected from your employer's creditors. This is a real consideration if you work for a government or nonprofit with financial instability.

Combining a 457 with other retirement accounts

If you have a 457 and also work a second job with a 401(k) or 403(b), you can contribute the maximum to both plans in the same year. The contribution limits are separate. For example, in 2024 you could contribute $23,500 to a 457 and $23,500 to a 401(k) at a different employer in the same calendar year. This is different from IRAs, where you have one combined limit across all IRAs you own.

If you have a 457 and a 403(b) at the same employer, the limits may be combined or separate depending on your employer's plan design. Ask your human resources department how your specific plans interact. Having multiple accounts requires tracking contributions across employers to avoid exceeding the IRS limits, which can result in penalties and tax complications.

Frequently Asked Questions

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

Most 457 plans do not allow withdrawals while you are still employed, unless your plan has a specific retirement age provision (like age 59½) that allows in-service distributions. Hardship withdrawals are rare. Your best option is to wait until you separate from your employer. Check your plan's summary plan description to see what your specific plan allows.

What happens to my 457 if my employer goes bankrupt?

Unlike a 401(k), a 457 is not held in a trust separate from your employer. The money technically belongs to your employer until you withdraw it. If your employer faces financial trouble, the account could be at risk. This is a real concern with some local governments or nonprofits. Ask your plan administrator about the funding arrangement and whether the plan is insured.

Can I roll my 457 into an IRA?

Yes, after you separate from your employer, you can roll your 457 balance into a traditional IRA or another employer plan that accepts rollovers. The rollover is not taxed, and the money continues to grow tax-free in the IRA. You must complete the rollover within 60 days or use a direct trustee-to-trustee transfer to avoid taxes and penalties.

Do I have to take required minimum distributions from a 457?

Yes, but the age is different than for IRAs. You must begin taking distributions from a 457 by April 1 of the year after you turn 73 (as of 2023, this age increased from 72). The amount is calculated using IRS life expectancy tables. If you are still working, some plans allow you to delay distributions until you actually retire.

Can I have a 457 and a Roth IRA at the same time?

Yes. A 457 is an employer plan, and an IRA is a separate individual account. You can contribute to both in the same year. However, if you have a high income, your ability to contribute to a Roth IRA may be limited by IRS income phase-out rules. A 457 contribution does not affect your Roth IRA may be able to access.