How a 457 Plan Works: Retirement Savings for Government and Nonprofit Workers

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

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. The money grows tax-free until you withdraw it in retirement. Unlike a 401(k), which is common at for-profit companies, a 457 plan is designed specifically for public sector workers—teachers, firefighters, city administrators, and employees of tax-exempt organizations.

The core appeal is straightforward: you reduce your taxable income now, your savings compound without annual tax bills, and you pay income tax only when you take the money out. For someone earning $60,000 and contributing $10,000 per year, that $10,000 doesn't count toward your taxable income that year. If you're in the 22% federal tax bracket, you save $2,200 in federal taxes immediately.

Your employer must offer the plan for you to use it. You cannot open a 457 on your own. If your employer does offer one, you choose how much to contribute (within IRS limits), and your employer deducts that amount from each paycheck and invests it according to the investment options the plan provides.

Key Takeaways

• A 457 plan reduces your current taxable income and lets your savings grow tax-free until withdrawal, making it a tax-deferred retirement account for government and nonprofit workers.
• Contribution limits for 2024 are $23,500 per year (or $47,000 if your plan allows catch-up contributions and you are age 50 or older), and these limits change annually.
• You can withdraw money from a 457 plan without the 10% early withdrawal penalty that applies to 401(k)s and IRAs, as long as you have separated from your employer or reached age 59½.
• A 457 plan is separate from Social Security and any pension your employer offers; you can have all three sources of retirement income at the same time.
• If you leave your job, you must decide whether to roll the balance into an IRA, leave it in the plan, or take a lump-sum distribution—each choice has different tax and investment consequences.

Contribution limits and how much you can set aside each year

The IRS sets an annual limit on how much you can contribute to a 457 plan. For 2024, that limit is $23,500. This limit applies to your total contributions across all 457 plans you may participate in—you cannot contribute $23,500 to two different plans and double your savings.

If you are age 50 or older and your plan document allows it, you may be able to make an additional catch-up contribution of $7,500 in the same year, bringing your total to $31,000. Not all plans offer this option, so check your plan documents or ask your benefits administrator whether yours does.

These limits change most years. The IRS adjusts them for inflation in $500 increments. Check your plan's annual summary or your employer's benefits website each January to confirm the current year's limit. Your employer should also send you a notice if the limit changes.

Tax treatment: when you pay taxes on your contributions and earnings

Money you contribute to a 457 plan is pre-tax, meaning it comes out of your paycheck before federal income tax is calculated. If you earn $60,000 and contribute $10,000, your taxable income for that year is $50,000. You do not pay federal income tax on that $10,000 in the year you contribute it.

The earnings your investments generate—dividends, interest, capital gains—also grow tax-free inside the account. If your $10,000 contribution grows to $15,000 over five years, you owe no tax on that $5,000 gain while the money stays in the plan.

You pay income tax on the full amount—contributions plus earnings—when you withdraw it. If you withdraw $100,000 at age 62, that $100,000 counts as income on your tax return for that year, and you owe federal (and usually state and local) income tax on it. This is why a 457 plan is called tax-deferred, not tax-free: you defer the tax bill to later, not avoid it.

Withdrawal rules and the absence of an early withdrawal penalty

A major difference between a 457 plan and a 401(k) or traditional IRA is the withdrawal penalty structure. With a 401(k) or IRA, if you withdraw money before age 59½, you owe a 10% early withdrawal penalty on top of income tax. A 457 plan has no such penalty.

You can withdraw money from a 457 plan without penalty once you have separated from service with your employer—meaning you quit, retire, or are laid off. You can also withdraw without penalty once you reach age 59½, even if you are still working. Some plans allow withdrawals for an unforeseeable emergency, though the definition of emergency is strict and varies by plan.

If you withdraw before separation from service and before age 59½, and your plan does not allow emergency withdrawals, you will owe income tax on the withdrawal plus a 10% penalty. This is rare but possible, so understand your plan's rules before you need the money.

Required minimum distributions (RMDs) apply to 457 plans. You must begin withdrawing money by April 1 of the year after you turn 73 (as of 2023; this age was raised from 72 under the SECURE 2.0 Act). The IRS calculates the minimum amount based on your age and account balance. If you do not take the RMD, you owe a penalty on the amount you should have withdrawn.

Rolling over a 457 plan when you change jobs

When you leave your job, you have several choices for what to do with your 457 balance. The right choice depends on your age, your new employer's plans, and your tax situation.

You can roll over your 457 balance into a traditional IRA. This moves the money tax-free to an account you control. The advantage is flexibility: IRAs offer more investment choices than most employer plans, and you can name a beneficiary. The disadvantage is that IRAs have a 10% early withdrawal penalty before age 59½ (with some exceptions), whereas a 457 does not. If you might need the money before 59½, leaving it in the 457 plan may be better.

You can also roll your 457 into a 401(k) or another 457 plan if your new employer offers one. This keeps the money in an employer plan and may preserve the early withdrawal flexibility of the 457 (though rules vary by plan).

If you do not roll over the balance, you can leave it in your former employer's plan and let it continue to grow. Many plans allow this, though some require you to withdraw the full balance by a certain date. Check your plan documents or contact the plan administrator before you leave your job.

A third option is to take a lump-sum distribution—withdraw the entire balance as a check. You will owe income tax on the full amount in that year. This is rarely the best choice unless you have a specific need for the cash, because you lose years of tax-deferred growth.

How a 457 plan differs from a 401(k) and a pension

A 457 plan and a 401(k) are both employer-sponsored retirement accounts, but they serve different workforces and have different rules. A 401(k) is for employees of for-profit companies. A 457 is for government and nonprofit workers. The contribution limits are the same ($23,500 for 2024), but the early withdrawal penalty rules differ: a 457 has no penalty after separation from service, while a 401(k) does.

A pension is a defined benefit plan—your employer promises to pay you a set monthly amount in retirement based on your salary and years of service. A 457 is a defined contribution plan—you and sometimes your employer put money in, and your retirement income depends on how much you saved and how well your investments performed. Many government workers have both a pension and access to a 457 plan. They are separate accounts, and you can receive income from both.

Social Security is also separate. Your 457 contributions do not affect your Social Security benefits, and Social Security does not reduce your 457 withdrawals. You can have all three sources of retirement income: a pension, a 457 balance, and Social Security.

Investment options and how your money is invested

Your employer's 457 plan offers a menu of investment options—typically mutual funds, index funds, stable value funds, and sometimes individual stocks or bonds. You choose how to divide your contributions among these options. Your choices determine how much risk you take and how much your money might grow.

A stable value fund is a conservative option that aims to preserve your principal and pay a modest return. A stock index fund is more aggressive and has more potential for growth but more year-to-year volatility. Most plans offer a target-date fund, which automatically shifts from stocks to bonds as you approach retirement.

You can usually change your investment choices quarterly or annually, and you can rebalance your existing balance at the same intervals. If you are unsure which options to choose, your plan may offer educational materials or a financial advisor consultation. Some plans also offer a self-directed brokerage option, which lets you invest in a wider range of securities but usually comes with higher fees.

Frequently Asked Questions

Can I contribute to both a 457 plan and a 401(k) at the same time?

Yes, if you work two jobs—one at a government or nonprofit employer with a 457 plan, and another at a for-profit company with a 401(k). However, your combined contributions to both plans cannot exceed the annual limit set by the IRS. For 2024, that limit is $69,000 across all employer plans combined (not per plan). Consult a tax professional to ensure you do not exceed this total.

What happens to my 457 plan if I die before retirement?

Your beneficiary—the person you named on your plan documents—inherits the balance. They can roll it into an inherited IRA or take distributions over their lifetime. If you did not name a beneficiary, the balance goes to your estate and is distributed according to your will or state law. Name a beneficiary when you enroll in the plan, and review it after major life changes.

Can I borrow from my 457 plan?

Some 457 plans allow loans, but not all. If your plan does, you typically can borrow up to 50% of your vested balance, up to a maximum amount set by the plan. You repay the loan through payroll deductions, usually over five years. If you leave your job before repaying the loan, the unpaid balance is treated as a distribution and you owe income tax on it. Check your plan documents to see if loans are available.

Do I have to take money out of my 457 plan when I retire?

You must begin taking required minimum distributions by April 1 of the year after you turn 73. Before that age, withdrawals are optional. You can leave your money in the plan and let it grow, or withdraw as much or as little as you want (subject to RMD rules once you reach 73). There is no requirement to withdraw at any specific age before 73.

What if my employer stops offering the 457 plan?

If your employer terminates the plan, you will be notified in advance. You will have the option to roll your balance into an IRA or another employer plan, or to take a distribution. The plan administrator will provide instructions and deadlines. You will not lose your money; you simply need to move it to another account.