- A 457 plan is a type of retirement plan offered by government and nonprofit organizations.
- 457 plans allow you to defer a portion of your pay, invest in various assets, and pay taxes upon withdrawal.
- Many employers offer 457 plans in tandem with other retirement options.
A 457 plan is a type of deferred compensation plan for workers in the government and nonprofit sectors. It is considered one of the best retirement plans because employees can set aside a portion of their earnings, defer taxes on that income, and grow their money to meet long-term goals.
If you work for a nonprofit or government organization, you may want to consider a 457 savings plan. Here's what you need to know about 457 plans.
Understanding 457 plans
Definition and overview of 457 plan
A 457 plan is a type of retirement plan offered to nonprofit and government employees. You can defer income, invest in various assets, and grow your wealth for retirement. Only nonprofit and governmental organizations can offer 457 plans, though they can be used alongside other retirement accounts, including 401(k)s and 403(b)s.
"It's part of the retirement plan family," says Frank Murillo, partner and managing director at Snowden Lane Partners. "On the surface, think '401(k)' for government and nonprofit employees."
With a 457 plan, you defer part of your income, use it to invest in annuities and mutual funds, and grow those. Contributions are tax-deferred, meaning you pay taxes when you withdraw funds later.
Types of 457 plans: 457(b) vs. 457 (f)
There are two types of 457 plans: the 457(b) and the 457(f).
- 457(b): The IRS refers to these as "eligible" deferred compensation plans. They're subject to all IRS contribution limits and taxation rules, and both employers and participants can contribute to them. There's a 457(b) option for governmental employers and a 457(b) for nonprofits and tax-exempt organizations. With some 457(b)s, you may have the option to designate Roth contributions, which are made using after-tax dollars.
- 457(f): These plans are also for nonprofits and government agencies, but they don't have to adhere to the IRS contribution limits. They're also fully funded by the employer, allowing employers to tie the benefit to performance, service duration, or other metrics. According to the IRS, these are sometimes called "golden handcuff" plans.
"457(b) plans work very similar to a 401(k) or 403(b), where the elective deferral amount is funded on a payroll-by-payroll basis," says Brian Haney, founder and CEO at The Haney Company. "For 457(f) plans, these are far more discretionary and often funded in a lump sum depending on when the employer chooses to fund them."
Benefits of a 457 plan
Tax-deferred savings
Contribution to a 457 plan allows you to reduce your taxable income and defer taxes to a later date, similar to a traditional 401(k) or IRA. You will pay tax on those contributions when you make a withdrawal. This can be financially advantageous if you think you will be in a lower tax bracket upon retirement.
No early withdrawal penalties
One standout advantage of 457 plans is that you can begin withdrawing funds as soon as you no longer work for the plan's sponsoring organization. This is quite different from other retirement plans, such as IRAs and 401(k)s, which require you to age 59 ½ before withdrawing from your account.
With a 457 plan, you're still subject to Required Minimum Distributions (RMDs) from your account starting at age 72 or 73, depending on your birth year. The exact annual amount varies based on age, balance, and other factors.
Coordination with other retirement plans
A 457 plan can also be used in tandem with other accounts like a 401(k) or IRA. In many cases, you may be able to choose both a 457 and another plan to maximize your contributions.
"They become extremely helpful and valuable vehicles to allow for higher earners to further defer income toward retirement," Haney says.
Contribution limits for 457 plans
Contributions on 457 plans are largely made by the participant using paycheck deductions, but employers can also contribute funds. Either way, there's one set contribution limit across both buckets.
Here's how those contributions look in 2024:
|
Age |
Contribution limit |
|
< 50 |
2024: 100% of your salary or $23,000, whichever is less |
|
50 or older |
2024: $30,500 ($23,000 + $7,500 in catch-up contributions) |
|
Within three years of retirement age, as specified by the plan |
$41,000 or the base limit ($23,000), plus the amount of your unused base limit in prior years, whichever is less |
The catch-up contributions for participants 50 or older are only allowed if you have a governmental 457(b). If you're enrolled in a nonprofit 457(b), your limit will be $23,000.
Comparing 457 plans to other retirement plans
457 plan vs. 401(k)
Both 457 and 401(k) plans are powerful tax-advantaged retirement savings vehicles for employees to grow their wealth. Both plans offer tax advantages, employer match benefits, and investment opportunities.
However, a 401(k) plan is designed for employees of private, for-profit companies, whereas a 457 plan is intended for government employees and those working for a nonprofit.
Contribution limits are actually the same for 401(k) and 457 plans: Workers younger than 50 can contribute up to $23,000 in 2024, and workers 50 and older can contribute an additional catch-up of $7,500. But the three-year catch up rule doesn't apply to 401(k)s.
457 plan vs. 403(b)
It's easy to confuse 457(b) plans with 403(b) plans, as both are offered in the nonprofit sector. In some cases, employers may even offer both plans simultaneously.
Despite this, the two are vastly different retirement options. For one, employer and participant contributions come with different limits on 403(b)s. On these plans, both contributions can total up to $23,000 or 100% of the employee's salary per year in 2024 (whichever is less).
Rollovers are also permitted on all 403(b)s, but only sometimes on 457 plans. Additionally, 403(b)s come with a 10% penalty if funds are withdrawn before 59 ½. With 457(b)s, you can withdraw as soon as you no longer work for the company.
FAQs about 457 plans
What is a 457 plan?
A 457 plan is a type of deferred compensation retirement plan offered to state and local government employees and some nonprofit organizations. It allows participants to save for retirement on a tax-deferred basis.
What are the benefits of a 457 plan?
The benefits of a 457 plan include tax-deferred growth, no early withdrawal penalties for distributions before age 59½, and the ability to make catch-up contributions if you are nearing retirement.
How much can I contribute to a 457 plan?
The annual contribution limit for a 457 plan in 2024 is $23,000, with an additional catch-up contribution of $7,500 for those aged 50 and older. Contributions can be coordinated with other retirement plans.
How does a 457 plan differ from a 401(k) or 403(b)?
While similar to a 401(k) or 403(b) in providing tax-deferred retirement savings, a 457 plan offers unique features like no early withdrawal penalties and different contribution limits. It is also typically available to government and nonprofit employees.
Can I roll over my 457 plan to another retirement account?
You can roll over a 457 plan to another retirement account like a 401(k) or IRA. Consult with a financial advisor to understand your best options.
