How Does a 457 Retirement Plan Work?
Understand the mechanics of a 457 retirement plan, from its independent contribution limits to its flexible, penalty-free withdrawal rules after separation.
A 457 plan is a type of non-qualified, tax-advantaged retirement plan available to specific groups of employees to help them save for retirement. The purpose of a 457 plan is to allow participants to set aside money from their salary before taxes are taken out, reducing their current taxable income. This money, along with any investment earnings, is not taxed until it is withdrawn, typically during retirement.
These plans function similarly to other employer-sponsored retirement accounts, where employees elect to have a portion of their paycheck automatically deducted and invested. The funds are held in an account for the exclusive benefit of the employee and their named beneficiaries.
Eligibility and Plan Types
Participation in a 457 plan is not available to all workers; it is for employees of state and local governments and certain non-governmental, tax-exempt organizations. This includes public sector employees like teachers, police officers, and municipal workers, as well as some employees of non-profits such as hospitals and charities.
The most common type of this plan is the 457(b), which is divided into two categories based on the employer. Governmental 457(b) plans are sponsored by state and local government entities. The assets contributed are held in a trust or custodial account for the exclusive benefit of participating employees, shielding the funds from the employer’s creditors.
The second category is the non-governmental 457(b) plan, offered by certain tax-exempt organizations. Unlike their governmental counterparts, the assets in these plans are not held in a trust and remain the property of the employer. This means the funds are subject to the claims of the employer’s general creditors, which introduces a level of risk for the employee. These plans are typically reserved for a select group of management or highly compensated employees.
Contributions to Your Plan
The Internal Revenue Service (IRS) sets annual limits on how much an individual can contribute. For 2025, the general contribution limit for a 457(b) plan is $23,500. This limit is independent of contributions made to a 401(k) or 403(b) plan. This means an eligible employee who has access to both a 457(b) and another plan type could contribute the maximum amount to both plans.
Governmental 457(b) plans offer catch-up contributions for those nearing retirement, though non-governmental plans are not permitted to offer these provisions. The standard catch-up allows participants age 50 or older to contribute an additional $7,500 in 2025. If an employer’s plan allows, participants aged 60, 61, 62, and 63 can make an even larger catch-up contribution of $11,250 for 2025.
A special feature available to 457(b) plans is the Special 3-Year Catch-Up. This provision allows a participant to contribute up to twice the general annual limit—as much as $47,000 in 2025—in the three years leading up to their designated normal retirement age. A participant cannot use both an age-based catch-up and the Special 3-Year catch-up in the same tax year; they must choose the one that allows for the greater contribution.
Some governmental 457(b) plans may also provide a Roth contribution option. Unlike traditional pre-tax contributions, Roth contributions are made with after-tax dollars. This means there is no immediate tax deduction, but qualified distributions, including earnings, are completely tax-free in retirement.
Withdrawals and Distributions
Money can be withdrawn from a 457(b) plan upon certain triggering events. The most common condition for taking a distribution is separation from service, which includes quitting a job, being laid off, or retiring. Other qualifying events include the death of the participant or the participant’s total and permanent disability.
A key feature of governmental 457(b) plans is the treatment of early withdrawals. Distributions from a governmental 457(b) plan taken after separation from service are not subject to the 10% early withdrawal penalty, even if the participant is under age 59½. This provides greater flexibility for public sector employees who may retire before that age. This exemption does not apply to funds that were rolled into the 457(b) from another type of plan, such as a 401(k).
The taxation of distributions depends on the type of contributions made. For traditional, pre-tax 457(b) accounts, all withdrawals are taxed as ordinary income. If the plan offers a Roth option and the participant made after-tax contributions, qualified distributions from the Roth portion are entirely tax-free. A qualified distribution is one made after a five-year holding period and upon reaching age 59½, death, or disability.
In-service withdrawals are highly restricted but may be permitted in the case of an “unforeseeable emergency.” The IRS defines this as a severe financial hardship resulting from an illness, accident, or property loss from a casualty. The amount withdrawn is limited to what is reasonably necessary to meet the emergency need, and the participant must have exhausted other available resources.
Finally, 457 plans are subject to Required Minimum Distribution (RMD) rules. These rules mandate that participants who have separated from service must begin taking annual withdrawals from their account starting at age 73.
Rollover Rules
The ability to move funds from a 457(b) plan into another retirement account is governed by specific rules that depend on the type of plan. For a governmental 457(b) plan, participants have considerable flexibility. Upon separating from service, an employee can roll over their account balance to most other types of retirement plans, including:
- A Traditional IRA
- A Roth IRA
- A 401(k) or 403(b)
- Another governmental 457(b) plan
A direct rollover, where the money is transferred directly from one financial institution to another, is a non-taxable event. An indirect rollover, where the participant receives a check that they must then deposit into a new retirement account within 60 days, can have tax consequences if not completed correctly. If pre-tax funds from a governmental 457(b) are rolled into a Roth IRA, the amount rolled over is treated as taxable income for that year.
The rules for non-governmental 457(b) plans are much more restrictive. Funds from a non-governmental 457(b) plan can only be rolled over into another non-governmental 457(b) plan. They cannot be moved into an IRA, 401(k), or any other type of retirement account.
It is also possible for some 457(b) plans to accept rollovers from other retirement accounts. A governmental 457(b) plan may, if its terms permit, accept rollovers from plans like 401(k)s, 403(b)s, and IRAs. However, the assets rolled in from other plan types will retain their original characteristics, meaning they would still be subject to the 10% early withdrawal penalty if taken out before age 59½.