A 457 plan is a retirement savings account for government and nonprofit workers, not private employees

A 457 plan is a tax-deferred retirement account offered by state and local government agencies, the federal government, and certain tax-exempt organizations. It works similarly to a 401(k), but with different rules about when you can withdraw money and how much you can contribute. The account lets you set aside pre-tax income during your working years, and you pay taxes on the money only when you withdraw it in retirement.

The key difference from a 401(k) is that a 457 plan has no early withdrawal penalty. You can take money out at age 59½ without the 10 percent penalty that applies to other retirement accounts — but you still owe income tax on it. You can also withdraw funds penalty-free if you separate from your employer, regardless of your age. This flexibility makes 457 plans useful for workers who may retire before 59½ or who need access to their savings sooner than traditional pension rules allow.

Key Takeaways

  • A 457 plan is only available through government employers or certain nonprofits, not through private companies.
  • You contribute pre-tax money from your paycheck, and the account grows tax-deferred until you withdraw it.
  • You can withdraw money at any age without a 10 percent early withdrawal penalty if you leave your job or reach 59½.
  • Contribution limits are set by the IRS each year and are separate from any 401(k) or 403(b) limits you may have.
  • Your employer does not have to match your contributions, though some do.

Who can open a 457 plan

Only employees of state and local governments can open a 457 plan through their employer. This includes workers for city halls, county offices, school districts, public universities, and state agencies. Federal employees have access to the Thrift Savings Plan (TSP) instead, which operates under different rules.

Certain tax-exempt organizations — primarily nonprofits with 501(c)(3) status — can also offer 457 plans to their employees. However, not all nonprofits do. You can only open a 457 plan through your employer; you cannot open one on your own as an individual.

If your employer offers a 457 plan, you will see it listed in your benefits materials or can ask your human resources or payroll department. Some employers offer both a 457 plan and a 403(b) plan (another retirement account for nonprofits and public employees), and you can contribute to both in the same year up to separate IRS limits.

How much you can contribute each year

The IRS sets an annual contribution limit for 457 plans. For 2024, the limit is $23,500 per year if you are under age 50. If you are 50 or older, you can contribute an additional $7,500 per year as a "catch-up" contribution, bringing your total to $31,000.

These limits change each year and are indexed to inflation. Your employer's payroll system will track your contributions and prevent you from exceeding the annual limit. The contribution limit for a 457 plan is separate from limits on other retirement accounts you may have — for example, if you also have a 403(b) through a nonprofit employer, you can contribute the maximum to both accounts in the same year.

Most 457 plans do not include employer matching contributions. Some government employers do match a portion of what you contribute, but this is less common than in private-sector 401(k) plans. Check with your employer to see whether matching is available in your plan.

When you can withdraw money without penalties

A 457 plan allows you to withdraw money in three situations without paying the 10 percent early withdrawal penalty that applies to IRAs and 401(k)s. First, you can withdraw at age 59½ without penalty. Second, you can withdraw at any age if you separate from your employer — meaning you resign, retire, or are laid off. Third, you can withdraw if you face a severe financial hardship, though your employer defines what qualifies and may require documentation.

Withdrawals are taxed as ordinary income in the year you receive them. If you withdraw $10,000, you will owe federal income tax on that $10,000 at your regular tax rate, plus any applicable state or local income tax. You do not owe the 10 percent penalty, but you do owe the income tax.

If you leave your job before age 59½, you have options for what to do with the money. You can withdraw it and pay taxes immediately, roll it over to an IRA or another employer's 457 plan, or leave it in the plan if your former employer allows it. Rolling over to an IRA or another 457 plan lets the money continue growing tax-deferred.

How a 457 plan differs from a 401(k) and 403(b)

A 457 plan, 401(k), and 403(b) are all tax-deferred retirement accounts, but they serve different employers and have different rules. A 401(k) is offered by private companies. A 403(b) is offered by nonprofits and public schools. A 457 plan is offered by government agencies and some nonprofits.

The most important difference is the withdrawal rule. A 401(k) and 403(b) charge a 10 percent penalty if you withdraw before age 59½, with limited exceptions. A 457 plan has no early withdrawal penalty if you leave your job, no matter your age. This makes a 457 plan more flexible if you plan to retire before 59½ or if you may change jobs.

Another difference is the contribution limit. If you work for a nonprofit and have access to both a 403(b) and a 457 plan, you can contribute the annual maximum to each account separately. The same is true if you have a 457 and a 401(k) through different employers, though this is rare. With a 401(k) and 403(b) through the same employer, the limits combine.

What happens to your 457 plan if you change jobs

If you leave your government or nonprofit job, you have several options for your 457 plan balance. You can withdraw the money and pay taxes on it immediately. You can roll it over to an IRA, where it continues to grow tax-deferred. You can roll it over to another employer's 457 plan if your new employer offers one. Or you can leave the money in your former employer's plan if they allow it, though this is less common.

If you roll the money to an IRA, you will have more investment options than most 457 plans offer, and you can keep the money growing tax-deferred until you withdraw it. If you roll it to another 457 plan, the money stays in a 457 structure with the same withdrawal rules.

Do not simply cash out your 457 plan when you leave a job unless you need the money immediately. Cashing out means paying income tax on the full balance in that year, which can push you into a higher tax bracket. A rollover lets you defer those taxes and keep the money working for retirement.

Frequently Asked Questions

Can I withdraw from my 457 plan before age 59½ without a penalty?

Yes, if you separate from your employer. You can withdraw at any age without the 10 percent early withdrawal penalty once you leave your job. You will still owe income tax on the withdrawal. If you stay with your employer, you cannot withdraw before 59½ without penalty unless you face a severe hardship that your employer approves.

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

Yes, if you work for two different employers — one offering a 457 and one offering a 401(k). You can contribute the annual maximum to each account separately. However, if both accounts are through the same employer, the contribution limits combine into one total.

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

Your beneficiary — usually your spouse or children, depending on what you designated — can withdraw the balance or roll it over to an IRA. The money is subject to income tax when withdrawn, but your beneficiary can spread withdrawals over time to manage the tax impact. Check your plan documents to confirm who your current beneficiary is.

Does my employer have to match my 457 contributions?

No. Most 457 plans do not include employer matching. Some government employers do match a portion of your contributions, but this is optional. Ask your payroll or human resources department whether your employer offers matching and, if so, how much.

Can I borrow from my 457 plan?

Some 457 plans allow loans, but not all. If your plan allows it, you can typically borrow up to half your balance, with a maximum of $50,000. You repay the loan through payroll deductions, usually over five years. Ask your plan administrator whether loans are available in your specific plan.