Is a 457 Plan Better Than a 401k Plan?

Many employer-sponsored plans exist to help workers save for their future, but the array of options can sometimes lead to confusion. Among the most common are 401(k) plans and 457 plans, each designed with distinct characteristics.

Understanding the fundamental differences between these retirement vehicles is important for making informed decisions. This article will clarify the unique features, eligibility requirements, contribution rules, and withdrawal provisions of both 401(k) and 457 plans.

Basic Eligibility and Plan Structure

A 401(k) plan is an employer-sponsored retirement savings account, established under Internal Revenue Code Section 401(k). These plans are widely offered by private-sector companies and some non-profit organizations. Employees contribute a portion of their pre-tax or Roth income, and employers may also contribute through matching funds or profit-sharing.

A 457 plan is a non-qualified deferred compensation plan primarily for state and local government employees, outlined in Internal Revenue Code Section 457. These are often referred to as governmental 457(b) plans. Tax-exempt organizations may also offer 457(b) plans, and 457(f) plans exist for highly compensated employees. Governmental 457(b) plans offer protections and features similar to traditional qualified retirement plans, unlike non-governmental versions.

Eligibility for a 401(k) plan is for employees of the sponsoring private company or non-profit. For 457 plans, participation is limited to employees of the specific governmental entity or eligible tax-exempt organization. Independent contractors are generally not eligible for employer-sponsored 401(k)s but may be for a 457(b) depending on the plan type.

Contribution Rules and Limits

Both 401(k) and 457 plans allow employees to contribute a portion of their salary, with IRS-set limits subject to annual adjustments. For 2025, the maximum employee elective deferral limit for both 401(k) and 457(b) plans is $23,500. This is the total an individual can contribute from their pay, regardless of how many plans they participate in.

Catch-up contributions are available for older workers. Individuals aged 50 and over can contribute an additional $7,500 to their 401(k) or governmental 457(b) plan in 2025, totaling $31,000. A new provision for 2025 allows those aged 60 to 63 to make an even higher catch-up contribution of $11,250 to their 401(k), 403(b), or governmental 457 plan, if allowed. This can increase their total contribution to $34,750.

Governmental 457(b) plans have a unique “special pre-retirement catch-up” provision, distinct from age-based catch-ups. This allows participants in the three years preceding their declared normal retirement age to contribute up to double the annual elective deferral limit, effectively $47,000 in 2025, to make up for prior years of under-contribution. A participant can only utilize one type of catch-up contribution in a given year.

Employer contributions in 401(k) plans often include matching funds or profit-sharing, added to employee deferrals, up to a combined total limit of $70,000 for 2025, or $77,500 if the employee is 50 or older and makes the standard catch-up. Governmental 457(b) plans may also receive employer contributions, but these are treated differently for limit purposes. Non-governmental 457(b) plans rarely include employer contributions.

Withdrawal and Distribution Provisions

Withdrawal rules for 401(k) and 457 plans differ, especially for early distributions. For 401(k) plans, distributions before age 59½ are generally subject to a 10% additional tax, as outlined in Internal Revenue Code Section 72. Exceptions to this penalty include separation from service at age 55 or older, disability, qualified medical expenses, substantially equal periodic payments (SEPPs), and qualified domestic relations orders (QDROs). Many 401(k) plans also permit participants to take loans against their vested balance.

A key advantage of governmental 457(b) plans is the absence of the 10% early withdrawal penalty upon separation from service, regardless of age. A former employee can access their governmental 457(b) funds without penalty if they leave their job, though distributions remain subject to ordinary income tax. In-service withdrawals from governmental 457(b) plans are limited to unforeseeable emergencies or small, unneeded amounts. Unlike 401(k)s, loans are not a common feature of 457(b) plans.

Non-governmental 457(b) and 457(f) plans have different rules for accessing funds. These plans are often subject to a “substantial risk of forfeiture,” meaning funds are not truly owned by the employee until certain conditions, like a specified period of service, are met. This structure helps retain key employees. Funds in non-governmental 457(b) plans are typically unavailable until separation from service or an unforeseeable emergency, and they are generally not protected from the employer’s creditors.

Regarding Required Minimum Distributions (RMDs), both 401(k) and 457 plans generally follow similar rules, governed by Internal Revenue Code Section 401. The age at which RMDs must begin is typically 73, though this can vary based on birth year.

Tax Implications and Other Distinctions

Both 401(k) and 457 plans offer pre-tax (traditional) and Roth contribution options. Pre-tax contributions allow for tax-deferred growth, with distributions taxed as ordinary income in retirement. Roth contributions are made with after-tax dollars, and qualified withdrawals in retirement are entirely tax-free.

Rollover provisions allow funds to be moved between different types of retirement accounts without immediate taxes. Governmental 457(b) plans offer flexibility, permitting rollovers into other qualified plans like 401(k)s, 403(b)s, or Individual Retirement Accounts (IRAs), and vice-versa. This portability is a considerable advantage for individuals who change employers or want to consolidate their retirement savings. Non-governmental 457(b) plans have more limited rollover options, often only allowing transfers to another non-governmental 457(b) plan.

Creditor protection is an important distinction. Assets in 401(k) plans are generally protected from creditors under the Employee Retirement Income Security Act (ERISA). This federal law establishes standards for most private-sector retirement plans, safeguarding employee savings. Governmental 457(b) plans also provide strong creditor protection, as their assets are held in trust for participants. However, non-governmental 457(b) plan assets are typically subject to the employer’s general creditors until distributed, posing a risk if the employer faces financial difficulties.

Investment options vary by plan administrator, but both 401(k) and 457 plans generally offer a range of choices, including mutual funds and exchange-traded funds. The specific selection and associated fees depend on the plan provider and employer.