401(k) vs. 457: Which Retirement Plan Is Better?

Saving for retirement is a fundamental aspect of financial well-being. Many employer-sponsored retirement plans exist, each with distinct features. Among the most recognized are the 401(k) and the 457. These plans facilitate tax-advantaged savings, allowing contributions and earnings to grow over time. Understanding these plans is important for developing a personal retirement strategy.

The 401(k) Retirement Plan

A 401(k) plan is a defined contribution retirement account primarily offered by private sector employers. It allows employees to contribute a portion of their pre-tax or after-tax (Roth) salary into an investment account. The Internal Revenue Service (IRS) sets annual limits on these contributions to ensure compliance with federal tax laws.

For 2025, employees can contribute up to $23,500 to a 401(k) plan. Individuals aged 50 and older can make an additional “catch-up” contribution of $7,500, totaling $31,000. Those aged 60 to 63 may contribute an even higher catch-up amount of $11,250, potentially totaling $34,750, if their plan permits.

Many employers offering 401(k) plans provide matching contributions. These employer contributions, along with employee contributions, are subject to vesting schedules, which determine when an employee gains full ownership of employer-contributed funds. The total combined employee and employer contribution limit for 2025 is $70,000, or $77,500 for those aged 50 and older. This combined limit can reach $81,250 for individuals aged 60-63 due to enhanced catch-up contributions.

Withdrawals from a 401(k) are permitted without penalty starting at age 59½. Taking distributions before this age incurs a 10% early withdrawal penalty, in addition to regular income taxes. Exceptions to this penalty include distributions for total and permanent disability or separation from service at age 55 or older.

Some 401(k) plans allow participants to borrow against their vested account balance. The maximum loan amount is the lesser of 50% of the vested balance or $50,000. These loans must be repaid within five years, with repayments often made through payroll deductions. Investment options within a 401(k) include mutual funds, exchange-traded funds (ETFs), and sometimes company stock, curated by the plan administrator.

The 457 Retirement Plan

A 457 plan is a deferred compensation plan available to employees of state and local governments, and certain tax-exempt organizations. These plans are referred to as 457(b) plans, with governmental 457(b) plans being the most common. A less common type, the 457(f) plan, is for highly compensated executives and carries different rules.

For 2025, the standard employee contribution limit for a 457(b) plan is $23,500. Individuals aged 50 and over can make an additional catch-up contribution of $7,500, totaling $31,000. Governmental 457(b) plans also offer an enhanced catch-up contribution for those aged 60 to 63, allowing an extra $11,250, for a total of $34,750 in 2025, if the plan adopts this provision.

A distinct feature of 457(b) plans is the “special 457 catch-up” provision, available in the three years leading up to a participant’s normal retirement age. This allows individuals to contribute up to double the annual limit, or $47,000 in 2025, if they have unused contribution limits from prior years. This special catch-up cannot be used with the age 50 or over catch-up contributions.

Withdrawal rules for governmental 457(b) plans differ from 401(k)s. Participants can take penalty-free withdrawals upon separation from service, regardless of their age. The 10% early withdrawal penalty that applies to 401(k)s before age 59½ does not apply to governmental 457(b) plans.

Loan provisions are available in many governmental 457(b) plans, allowing participants to borrow up to the lesser of 50% of their vested account balance or $50,000. Repayment terms span five years. Investment options within 457(b) plans include mutual funds and other investment vehicles chosen by the plan administrator. Both pre-tax and Roth 457(b) options can be available.

Comparing Key Features

The primary distinction between 401(k) and 457 plans lies in the type of employer that offers them. 401(k) plans are predominantly found in the private sector, whereas 457 plans are sponsored by governmental entities and certain non-profit organizations. This fundamental difference influences several other characteristics of the plans.

Contribution limits for employee deferrals are identical for both plans in 2025, at $23,500. The standard age 50 and over catch-up contribution is also the same, at $7,500. However, 457(b) plans offer a unique “special 457 catch-up” in the three years prior to retirement, allowing contributions of up to twice the annual limit, or $47,000 in 2025. Both plans also feature a higher catch-up for ages 60-63, at $11,250.

A significant difference lies in early withdrawal rules. 401(k) distributions before age 59½ are subject to a 10% penalty, with some exceptions like separation from service at age 55 or older. Governmental 457(b) plans permit penalty-free withdrawals at any age upon separation from service, offering greater flexibility for early retirees.

Loan provisions are common in both plan types, allowing borrowing up to the lesser of 50% of the vested balance or $50,000. Employer contributions, particularly matching contributions, are a more prevalent feature of 401(k) plans. While governmental 457(b) plans can receive employer contributions, a direct matching structure is less common than in 401(k)s.

Creditor protection also differs. 401(k) plans benefit from protection under the Employee Retirement Income Security Act (ERISA), shielding assets from creditors. Governmental 457(b) plans, not subject to ERISA, rely on state laws for creditor protection.

Upon leaving employment, funds from both types of plans can be rolled over into an Individual Retirement Account (IRA) or another employer-sponsored retirement plan. Governmental 457(b) plans offer broad rollover flexibility. Non-governmental 457(b) plans have more limited rollover options, typically only to another non-governmental 457(b) plan.

Choosing the Right Plan for You

Selecting the appropriate retirement plan involves considering individual financial goals and current employment circumstances. Many individuals find their choice limited to what their employer offers, making it important to maximize the benefits of the available plan. For those with access to both, or considering future employment options, understanding the nuances becomes particularly valuable.

Prioritizing any available employer matching contributions is a fundamental strategy for retirement savings. If an employer offers a 401(k) match, contributing at least enough to receive the full match should be a primary objective, as this represents an immediate return on investment. This “free money” significantly boosts savings without requiring additional personal contributions beyond the match threshold.

Individuals planning for early retirement, especially before age 59½, may find the withdrawal rules of a governmental 457(b) plan particularly advantageous. The ability to access funds upon separation from service without the 10% early withdrawal penalty can provide greater financial flexibility during a career transition or early retirement phase. This feature allows for a smoother bridge to traditional retirement age without incurring tax penalties.

For those with substantial savings capacity, utilizing both a 401(k) and a 457 plan, if available, can allow for contributions exceeding the limit of a single plan. This dual participation, especially with the unique “special 457 catch-up” provision, enables higher overall tax-deferred savings. Maximizing contributions to both plans can accelerate retirement accumulation, particularly for high-income earners.

Considering the potential need for access to funds before retirement age is also important. While both plans may offer loan provisions, the specific terms and availability vary by plan. Understanding these rules, along with the penalty-free withdrawal option in governmental 457(b) plans, helps in planning for unforeseen financial needs. Evaluating current and future tax situations is also essential when deciding between pre-tax and Roth contribution options within either plan.