Is a 457(b) Plan an IRA? Key Differences Explained

Retirement planning involves understanding various savings vehicles, each with distinct features. 457(b) plans and Individual Retirement Accounts (IRAs) are common options that help individuals save for retirement. While both serve as retirement savings tools, their structures, eligibility, contribution rules, and withdrawal provisions differ significantly. This article aims to distinguish between 457(b) plans and IRAs to provide a clearer understanding of their roles in retirement savings.

Characteristics of 457(b) Plans

A 457(b) plan is a deferred compensation retirement plan primarily offered by state and local government employers and some tax-exempt organizations. These plans allow eligible employees to defer a portion of their compensation on a pre-tax basis, reducing current taxable income. Contributions grow tax-deferred until withdrawal, typically during retirement.

A key distinction within 457(b) plans exists between governmental and non-governmental plans. Governmental 457(b) plans, offered by state and local governments, generally provide stronger creditor protection and more flexible withdrawal rules. Non-governmental 457(b) plans, available through some tax-exempt organizations, are typically unfunded and subject to creditors of the employer.

For 2025, the standard contribution limit for employee elective deferrals to a 457(b) plan is $23,500. Individuals aged 50 or older can make an additional catch-up contribution of $7,500, increasing their total possible contribution to $31,000. A special pre-retirement catch-up provision allows participants to contribute up to twice the normal limit for the three years prior to their designated normal retirement age, potentially reaching $47,000 in 2025, provided they have unused contribution amounts from prior years.

Distributions from governmental 457(b) plans upon separation from service generally do not incur the 10% early withdrawal penalty that applies to other retirement accounts if withdrawals occur before age 59½. This absence of penalty is a notable feature for participants in governmental plans. While contributions are typically pre-tax, some governmental 457(b) plans may offer a Roth option for after-tax contributions.

Characteristics of Individual Retirement Accounts

Individual Retirement Accounts (IRAs) are personal savings vehicles established by an individual, not through an employer, to save for retirement with tax advantages. The two primary types are Traditional IRAs and Roth IRAs, each offering different tax treatments. Traditional IRAs allow for pre-tax contributions that can be tax-deductible, with earnings growing tax-deferred until retirement.

Roth IRAs are funded with after-tax contributions. Qualified withdrawals in retirement, including earnings, are entirely tax-free. To contribute to either a Traditional or Roth IRA, an individual must have earned income. Roth IRA contributions are also subject to income limitations, where higher earners may have their ability to contribute reduced or eliminated. For 2025, single filers can make a full Roth IRA contribution if their modified adjusted gross income (MAGI) is less than $150,000, while joint filers must have a MAGI below $236,000.

The annual contribution limit for IRAs, both Traditional and Roth combined, is $7,000 for 2025. Individuals aged 50 and older can contribute an additional $1,000 as a catch-up contribution, bringing their total to $8,000. These limits apply across all IRAs an individual owns.

Distributions from Traditional IRAs are generally taxed as ordinary income in retirement, and Required Minimum Distributions (RMDs) typically begin after a certain age. Withdrawals from Traditional IRAs before age 59½ are generally subject to a 10% early withdrawal penalty, in addition to being taxed. Roth IRA distributions are tax-free and penalty-free if they are qualified, meaning the account has been open for at least five years and the owner is at least 59½, disabled, or using the funds for a first-time home purchase. Unlike Traditional IRAs, Roth IRAs do not have RMDs for the original owner.

Distinguishing Between 457(b) Plans and IRAs

The fundamental differences between 457(b) plans and IRAs lie in their sponsorship, eligibility, contribution mechanisms, and withdrawal flexibility. A 457(b) plan is an employer-sponsored deferred compensation plan, while an IRA is an individual retirement account established and funded independently. This difference in sponsorship influences who can participate and how contributions are made.

Eligibility for a 457(b) plan is tied to employment with a qualifying governmental entity or tax-exempt organization, whereas an IRA can be opened by anyone with earned income, subject to certain income limitations for Roth IRAs. The contribution limits also vary considerably. In 2025, the standard 457(b) employee contribution limit is significantly higher at $23,500 compared to the $7,000 limit for IRAs. Both plan types offer catch-up contributions for those aged 50 and older, but the amounts differ: $7,500 for 457(b) plans and $1,000 for IRAs. 457(b) plans have unique catch-up provisions, such as the special pre-retirement catch-up, which are not available for IRAs.

A notable distinction in withdrawal rules involves early withdrawal penalties. Governmental 457(b) plans typically allow penalty-free withdrawals upon separation from service, regardless of age. In contrast, distributions from IRAs before age 59½ are generally subject to a 10% penalty, unless a specific exception applies. Regarding tax treatment, both 457(b) plans and Traditional IRAs typically involve pre-tax contributions and tax-deferred growth. IRAs offer the Roth option for after-tax contributions with tax-free qualified withdrawals, a feature not universally available in 457(b) plans.

Rollover options also differ. Funds from a 457(b) plan can generally be rolled over into other qualified retirement plans or IRAs. IRAs can be rolled over into other IRAs or, in some cases, into employer-sponsored plans. Both account types allow for tax-deferred growth on pre-tax contributions.