Are Contributions to a 457 Plan Pre-Tax?

A 457 plan is a tax-advantaged retirement savings vehicle for employees of state and local governments and some non-governmental, tax-exempt organizations. These are deferred compensation plans, meaning an employee defers a portion of their salary into the plan to be paid out later, such as upon retirement. The funds contributed are then invested, allowing them to grow over the employee’s career.

Tax Treatment of Contributions

Contributions to a traditional 457(b) plan are made on a pre-tax basis. This means the amount an employee contributes is deducted from their gross pay before federal income taxes are calculated, reducing their current taxable income. For example, an employee earning $60,000 who contributes $5,000 to a 457(b) plan will only be taxed on $55,000 of income for that year.

This pre-tax arrangement lowers an employee’s immediate tax bill but does not reduce Social Security or Medicare taxes owed. The contribution and any investment earnings are tax-deferred, meaning income tax is not paid until the money is withdrawn. This allows the full contribution and its earnings to grow without being taxed until distribution.

Many employers also offer a Roth 457(b) option, which provides an alternative tax treatment. Contributions are made on an after-tax basis, so an employee pays income tax on them in the year they are made. While this provides no immediate tax deduction, it allows for tax-free withdrawals in retirement if certain conditions are met.

Annual Contribution Limits

The Internal Revenue Service (IRS) sets annual limits on the amount an employee can contribute to a 457(b) plan. For 2025, the general contribution limit is $23,500, which applies to the total of all traditional and Roth contributions. An employee’s contributions cannot exceed 100% of their includible compensation for the year if it is less than the dollar limit.

Governmental 457(b) plans may permit participants to make additional catch-up contributions. Employees age 50 or older can contribute an additional $7,500 for 2025, increasing their total possible contribution to $31,000. For 2025, participants in governmental plans ages 60, 61, 62, or 63 can make a larger catch-up contribution of $11,250.

A separate catch-up provision may be available to participants in the three years prior to the plan’s normal retirement age. This provision allows a contribution of up to twice the annual deferral limit ($47,000 in 2025), though the actual limit depends on unused contributions from prior years. An employee cannot use both the age 50+ catch-up and this three-year catch-up in the same tax year.

Taxation of Withdrawals

The tax treatment of withdrawals from a 457(b) plan depends on whether contributions were pre-tax or after-tax. For a traditional 457(b) plan with pre-tax contributions, all distributions are taxed as ordinary income in the year they are received. The withdrawn amount is added to other income and taxed at applicable rates.

For a Roth 457(b) plan, qualified distributions are entirely tax-free. A distribution is qualified if the account has been open for at least five years and the withdrawal is made after the account holder reaches age 59½, becomes disabled, or dies. Since contributions were made with after-tax dollars, neither they nor the investment earnings are taxed upon withdrawal.

A feature of governmental 457(b) plans is that when an employee separates from service, they can take distributions without the 10% early withdrawal penalty that normally applies before age 59½. This applies regardless of the employee’s age at separation. However, this penalty exemption does not apply to funds rolled into the 457(b) from other plan types, such as a 401(k) or an IRA.