Are 401k and 457 Contribution Limits Combined?

For many individuals, planning for retirement involves navigating various savings options, each with its own set of rules and benefits. The 401(k) and 457 plans are two popular choices, particularly for employees in different sectors. Understanding the contribution rules for these plans is essential for maximizing savings.

Plan Contribution Rules

The 401(k) and 457 plans are both designed to facilitate retirement savings but operate under distinct guidelines. For 2024, the IRS has set the contribution limit for 401(k) plans at $23,000, an increase due to inflation adjustments. This limit applies to employee deferrals, the amounts employees choose to contribute from their salaries.

The 457 plan, often used by state and local government employees and certain non-profit organizations, also has a 2024 contribution limit of $23,000. A unique feature of the 457 plan is the “special catch-up” provision, which allows participants nearing retirement to contribute additional amounts—potentially doubling the standard limit during the three years before retirement age. This option is particularly valuable for those who began saving later in their careers.

Both plans offer tax advantages, as contributions are typically made on a pre-tax basis, reducing taxable income for the year. However, the tax treatment upon withdrawal differs. Withdrawals from a 401(k) are subject to ordinary income tax, with early withdrawals before age 59½ potentially incurring a 10% penalty. In contrast, 457 plans do not impose an early withdrawal penalty, offering greater flexibility for participants who may need access to funds before traditional retirement age.

Combined vs Separate Caps

The IRS treats 401(k) and 457 plans as independent, allowing individuals to contribute the maximum allowable amount to each plan separately. For 2024, this means an individual could contribute $23,000 to a 401(k) and another $23,000 to a 457 plan, effectively doubling their retirement savings potential.

This separation stems from the different legislative frameworks governing each plan. The 401(k) is regulated under the Internal Revenue Code Section 401, while the 457 plan falls under Section 457. These distinct legal foundations enable separate contribution limits. Employees with access to both plans, such as those in public sector roles offering a 457 plan alongside a 401(k), can take advantage of this opportunity to boost their tax-advantaged savings.

Catch-Up Options

Catch-up contributions provide a way for individuals nearing retirement to increase their savings. For 2024, individuals aged 50 and older can make additional contributions to their 401(k) plans, with a catch-up contribution limit of $7,500. This allows eligible participants to contribute up to $30,500 annually when combining the standard and catch-up limits.

The 457 plan offers its “special catch-up” provision, allowing certain participants to contribute up to double the standard limit during the three years before their declared retirement age. In 2024, this could mean contributions of up to $46,000 annually, significantly enhancing retirement savings. However, the special catch-up provision cannot be combined with the standard age 50 catch-up option, necessitating careful planning and strategic decision-making.