Background and History

Established in the 1970s, the 457(b) plan was created to help government and nonprofit employees save for retirement. Unlike 401(k) or 403(b) plans mainly used in the private sector, 457(b) plans cater specifically to public-sector and certain nonprofit workers. Over time, these plans have gained popularity due to features such as higher contribution limits and specialized catch-up provisions that address the unique retirement needs of these employees.

How a 457(b) Plan Works

Employees contribute a portion of their salary to the 457(b) plan on a pre-tax basis, reducing their current taxable income. The money then grows tax-deferred until it’s withdrawn, usually at retirement. Plan rules may also allow employer contributions. Importantly, unlike 401(k) and 403(b) plans, 457(b) withdrawals are not subject to the 10% early withdrawal penalty if taken before age 59½, although regular income taxes apply.

Who is Eligible?

Eligibility is limited primarily to:

  • Employees of state and local governments
  • Employees of certain nonprofit organizations classified under 501(c)(3)
    Private-sector employees are generally not eligible to participate in 457(b) plans.

Benefits of a 457(b) Plan

  • Tax Deferral: Contributions reduce taxable income now, and investment earnings grow tax-deferred.
  • Higher Contribution Limits: For 2025, employees can contribute up to $23,000 annually, with additional catch-up contribution options.
  • Catch-Up Contributions: Special provisions allow increased contributions in the final three years before normal retirement age.
  • No Early Withdrawal Penalty: Withdrawals before age 59½ are allowed without the usual 10% penalty, unlike 401(k) plans.
  • Flexible Withdrawals: After separation from service, funds can be withdrawn without mandatory distribution requirements.
  • Employer Contributions: Some plans include employer matching or additional contributions.
  • Supplement to Other Retirement Income: Works alongside Social Security and other retirement accounts to build a diversified retirement income stream.

Real-World Examples

  • Jane, a city government employee, contributes $19,500 yearly to her 457(b) to reduce taxable income and benefit from tax-deferred growth.
  • Mike, nearing retirement, utilizes the catch-up contribution feature to increase his savings significantly in his late career.
  • Samantha, who retires early, accesses her 457(b) funds before age 59½ without penalty, providing financial flexibility.

Tips and Strategies

  • Maximize contributions early to benefit from compounding and tax deferral.
  • If eligible for multiple plans (401(k), 403(b), and 457(b)), consider contributing to each to increase total retirement savings.
  • Use catch-up contributions if you start saving late or want to boost retirement assets.
  • Plan withdrawals carefully to manage income tax liability in retirement.

Common Misconceptions

  • 457(b) plans are not the same as 401(k)s: They differ in withdrawal penalties and contribution rules.
  • Not all 457(b) plans include employer matching: Verify plan details.
  • Early withdrawals are penalty-free but not tax-free: Withdrawals before retirement age incur income tax.
  • Catch-up features can significantly increase contributions: Don’t overlook these opportunities in your later working years.

Frequently Asked Questions

Can I contribute to both a 457(b) and a 401(k)? Yes, contributing the maximum to both is allowed, effectively doubling retirement savings potential.

When can I access my 457(b) funds? Withdrawals are permitted after leaving the employer without early withdrawal penalties.

Are distributions from a 457(b) taxed? Yes, all withdrawals are taxed as ordinary income.

What if I change jobs? 457(b) balances can be rolled over into another eligible plan or IRA to maintain tax advantages.

Additional Resources

For official IRS guidance, see IRS Retirement Topics – 457(b) Plans. To learn more about related plans like 401(k)s, check our related article on 401(k) Plans.

Conclusion

A 457(b) plan is a powerful retirement savings option for eligible public-sector and nonprofit employees. Its tax advantages, higher contribution limits, and flexible withdrawal rules make it a valuable tool to supplement retirement income and offer financial flexibility. Understanding its unique features can help participants maximize their savings and achieve a more secure retirement.