What Are the Rules for a 457 Retirement Plan?

A 457 retirement plan is a non-qualified, tax-advantaged deferred-compensation plan available to employees of state and local public entities and certain tax-exempt non-governmental organizations. Employees can set aside a portion of their salary on a pre-tax basis, which lowers their current taxable income. The contributed funds are invested and grow tax-deferred, meaning no taxes are paid on investment earnings as they accumulate. Taxes are due when funds are withdrawn during retirement, at which point they are treated as ordinary income.

Key Plan Distinctions

The rules governing 457 plans depend on the type of employer. The two primary categories of 457(b) plans are governmental and tax-exempt. A governmental 457(b) plan is sponsored by a state or local government entity, while a tax-exempt 457(b) plan is offered by a non-governmental, tax-exempt organization like a hospital.

A primary difference lies in how the plan’s assets are held. For governmental 457(b) plans, all assets must be held in a trust, custodial account, or annuity contract for the exclusive benefit of participants. This structure segregates the retirement funds from the employer’s general assets, protecting them from the employer’s creditors in case of bankruptcy.

In contrast, assets in a tax-exempt 457(b) plan are not held in a separate trust. The funds remain a general asset of the employer and are subject to the claims of the employer’s creditors if the organization experiences financial failure.

A third, less common type is the 457(f) plan, offered to a select group of highly compensated or management-level employees. Unlike 457(b) plans, 457(f) plans allow for contributions that exceed the standard annual limits. The defining feature is that funds are subject to a “substantial risk of forfeiture,” meaning the employee only gains full rights to the money after meeting certain conditions.

Contributions to Your Plan

Contributions to a 457(b) plan are made through payroll deductions, where an employee defers a portion of their salary. The standard annual contribution limit is $23,500, which applies to the total of employee and any employer contributions. Some plans also offer a Roth 457(b) option, where contributions are made with after-tax dollars for tax-free distributions in retirement.

Participants in governmental 457(b) plans who are age 50 or over may be eligible to make additional “catch-up” contributions of $7,500. This provision is not permitted for tax-exempt 457(b) plans.

Beginning in 2025, a new provision allows participants in governmental plans aged 60 through 63 to make a higher catch-up contribution if their employer adopts it. This amount is the greater of $10,000 or 150% of the regular catch-up amount, allowing for a catch-up of $11,250 for 2025.

A separate feature available to both governmental and tax-exempt 457(b) plans is the “Special 457 Catch-up” provision. This is available to participants in the three years prior to their normal retirement age. It allows an employee to contribute the lesser of twice the annual contribution limit or the basic annual limit plus the amount of the basic limit not used in prior years.

For example, if the annual limit is $23,500, twice the limit is $47,000. If an employee had $15,000 in unused contributions from prior years, their special catch-up limit would be $38,500 ($23,500 + $15,000), as this is less than the $47,000 cap. An employee cannot use both an age-based catch-up and the special catch-up in the same year.

Distributions From Your Plan

Taking money out of a 457(b) plan is permitted upon certain triggering events. The most common event is separation from service, which includes retirement, quitting, or being laid off. Other qualifying events for distribution include the participant’s death or the occurrence of an “unforeseeable emergency.”

The IRS defines an unforeseeable emergency as a severe financial hardship resulting from an illness, accident, property loss, or other similar extraordinary circumstances beyond the participant’s control. When you take a distribution from a traditional 457(b) plan, the amount withdrawn is taxed as ordinary income for that year. Your plan administrator will report the distribution to you and the IRS on Form 1099-R.

An advantage of governmental 457(b) plans relates to early withdrawals. Distributions from a governmental 457(b) plan are not subject to a 10% early withdrawal penalty, even if taken before age 59½. This rule applies as long as the distribution occurs after you have separated from service with the employer.

Like other tax-advantaged retirement plans, 457(b) plans are subject to Required Minimum Distribution (RMD) rules. These rules mandate that you must begin taking at least a minimum amount from your account annually starting in the year you turn 73. Failure to take the required RMD can result in a tax penalty.

Rollovers and Portability

The ability to move your 457 plan funds to another retirement account, known as a rollover, depends on whether you have a governmental or a tax-exempt 457(b) plan.

If you have a governmental 457(b) plan, you have broad portability options. You can roll over your funds to most other types of retirement accounts, including another governmental 457(b) plan, a 401(k), a 403(b), or a traditional IRA. A direct rollover, where funds are transferred directly to the new account, is a non-taxable event.

The rules for tax-exempt 457(b) plans are more restrictive. Assets from a tax-exempt 457(b) plan can only be rolled over into another tax-exempt 457(b) plan. You cannot roll these funds into a 401(k) or an IRA.

Because of the limited rollover options, participants leaving an employer with a tax-exempt plan may have to choose between taking a taxable distribution or leaving the funds in the former employer’s plan. A plan-to-plan transfer may be possible if they move to another non-profit that offers a 457(b) plan.