457(b) Plan

Overview of 457(b) Plans

A 457(b) plan is a retirement savings vehicle offered by state and local governments, certain public entities, and some tax-exempt nonprofit organizations. Created by Congress primarily for employees not covered under private-sector plans like 401(k)s, a 457(b) plan allows eligible participants to defer compensation on a pre-tax basis, enabling tax-deferred growth until funds are withdrawn.

Types of 457 Plans

There are two main categories:

• Governmental 457(b) Plans: Most commonly offered by state, local government agencies, and public entities such as school districts and hospitals.
• Non-Governmental 457(b) Plans: These are offered by certain tax-exempt nonprofit organizations under 501(c)(3) status but are subject to stricter provisions regarding participation and distributions.

Notably, private-sector employees typically aren’t eligible for 457(b) plans but may access other retirement savings plans.

Contributions and Limits

Participants can contribute a portion of their salary before taxes, which lowers their current taxable income.

• The employee deferral limit for 2024 is $23,000.
• If you are within three years of the plan’s normal retirement age, you may be eligible for a special catch-up contribution allowing additional contributions up to the annual limit.

Important: The 457(b) plan’s contribution limit applies separately from 401(k) or 403(b) limits. Therefore, you can contribute the maximum to both a 457(b) and a 401(k) or 403(b) independently, effectively increasing your total tax-deferred savings potential.

Tax Advantages

• Contributions are made pre-tax, reducing taxable income.
• Earnings on investments grow tax-deferred.
• Taxes are paid upon withdrawal, typically during retirement when income and tax rates may be lower.

Withdrawals and Penalties

A key difference from 401(k) or 403(b) plans is that withdrawals from a 457(b) plan upon separation from service do not incur the 10% early withdrawal penalty, regardless of your age. However, normal income tax applies to all distributions.

Withdrawals can be started upon retirement, job change, or other separation events without penalty.

Investment Options

Plan participants can choose from a diversified set of investment options, typically including mutual funds, stocks, bonds, and sometimes stable value funds. The available choices depend on the specific plan provider and administrator.

Eligibility

Employees eligible for 457(b) plans generally include:

• State and local government employees
• Workers in certain nonprofit organizations (usually 501(c)(3) tax-exempt entities)
• Employees of some public hospitals, school districts, and similar public entities

Strategies to Maximize 457(b) Plan Benefits

• Contribute early and consistently: Compounding tax-deferred growth is one of the plan’s biggest benefits.
• Utilize catch-up contributions: Especially if you are close to retirement age.
• Combine with 401(k) or 403(b) accounts: Since contribution limits are independent, coordinating contributions can boost retirement savings significantly.
• Plan distributions strategically: Because withdrawals are taxed as ordinary income, consider timing withdrawals to minimize overall tax impact.

Common Misunderstandings

• Not understanding the contribution limit separations: The 457(b) plan’s limit is separate from the 401(k) and 403(b), which some confuse.
• Misconception about early withdrawal penalties: Unlike many other plans, 457(b) plans do not impose a 10% early withdrawal penalty once you have separated from service.
• Using catch-up contributions incorrectly: There are two distinct catch-up provisions, but you can only use one at a time, not both simultaneously.

Frequently Asked Questions

Can I have both a 401(k) and a 457(b) plan?
Yes, you can participate and contribute up to the maximum limit in each plan, maximizing your tax-advantaged retirement savings.

What happens if I change jobs?
You can roll over your 457(b) plan assets into an IRA or another eligible retirement plan without tax consequences, preserving your savings.

Is there an early withdrawal penalty?
No, withdrawals after separating from employment do not incur the 10% penalty, though regular income tax applies.

Summary Table: 457(b) Plan Basics

For more detailed IRS guidance, visit the IRS Retirement Topics on 457 Plans.

Explore related topics such as Retirement Planning to build a comprehensive understanding of preparing for your financial future.