What Is a 457 Plan vs. a 401(k)?

Saving for retirement is a fundamental aspect of financial planning, enabling individuals to build a secure future. Employer-sponsored savings plans offer structured avenues for accumulating wealth, often providing tax advantages that accelerate growth. These programs encourage consistent contributions, helping participants leverage the power of compounding for long-term financial stability. Understanding these workplace offerings allows individuals to make informed decisions about their savings strategy.

Understanding 401(k) Plans

A 401(k) plan is a retirement savings vehicle primarily offered by for-profit companies, though some non-profit organizations also provide them. This defined contribution plan allows employees to set aside a portion of their paycheck for retirement, with contributions often made on a pre-tax basis, which reduces current taxable income. Many plans also offer a Roth 401(k) option, where contributions are made with after-tax dollars, leading to tax-free withdrawals in retirement, provided certain conditions are met.

Employers frequently enhance 401(k) plans through contributions, such as matching contributions or profit-sharing arrangements. Employee contributions are always immediately vested, meaning they are owned by the employee. Employer contributions may be subject to a vesting schedule, which requires an employee to work for a period before fully owning those funds. Vesting schedules include cliff vesting, where full ownership is granted after a set number of years, or graduated vesting, which grants increasing ownership percentages over time.

Annual contribution limits for 401(k) plans are set by the Internal Revenue Service (IRS). For 2025, the employee elective deferral limit is $23,500. Individuals aged 50 and over can make additional “catch-up” contributions of $7,500 for 2025. The total combined limit for both employee and employer contributions for 2025 is $70,000, or $77,500 for those aged 50 and older.

Withdrawals from a 401(k) plan begin at age 59½ without penalty. Distributions taken before this age are subject to ordinary income tax and an additional 10% early withdrawal penalty, unless an IRS exception applies. Common exceptions include separation from service at age 55 or older, disability, or certain medical expenses. Many 401(k) plans also allow participants to take loans against their vested account balance, limited to 50% of the vested amount or $50,000, whichever is less, with repayment required within five years. Funds held in a 401(k) plan are afforded strong creditor protection under the Employee Retirement Income Security Act (ERISA).

Understanding 457 Plans

A 457 plan is a non-qualified, deferred compensation plan primarily offered by state and local government entities (governmental 457(b) plans) and certain tax-exempt non-profit organizations (non-governmental 457(b) plans). These plans allow employees to defer a portion of their compensation on a pre-tax basis, with earnings growing tax-deferred until withdrawal. Many 457(b) plans also provide a Roth option for after-tax contributions and tax-free qualified withdrawals.

The annual elective deferral limit for 457(b) plans for 2025 is $23,500. Individuals aged 50 and older can contribute an additional $7,500 in catch-up contributions for 2025. A unique characteristic of 457(b) plans, particularly governmental ones, is a “special catch-up” provision for participants within three years of their normal retirement age. This provision allows contributions up to twice the normal annual limit ($47,000 for 2025) or the annual limit plus unused contributions from prior years, whichever is less.

A significant feature of 457(b) plans concerns withdrawal rules upon separation from service. Governmental 457(b) plans do not impose the additional 10% early withdrawal penalty for distributions taken before age 59½, provided the participant has separated from service. This means funds can be accessed without this penalty regardless of the participant’s age if they leave employment. Non-governmental 457(b) plans may have more restrictive withdrawal options while still employed.

Loan provisions are available in 457(b) plans, allowing participants to borrow against their vested account balance. Loan limits are similar to 401(k)s, allowing borrowing of up to 50% of the vested balance or $50,000, whichever is less, repayable over five years. Governmental 457(b) plans offer creditor protection similar to ERISA-covered plans. Non-governmental 457(b) plans are not subject to ERISA and may be considered assets of the employer, potentially exposing them to the employer’s creditors.

Key Differences and Similarities

The types of employers offering these plans represent a fundamental distinction. 401(k) plans are predominantly sponsored by for-profit companies and some non-profit entities, serving the private sector workforce. In contrast, 457(b) plans are primarily available to employees of state and local governments, as well as specific tax-exempt organizations, catering to public sector and certain non-profit employees.

Withdrawal rules and penalties present a notable difference between the two plan types. While both plans require income tax on pre-tax withdrawals, 401(k) distributions taken before age 59½ are typically subject to an additional 10% early withdrawal penalty, unless a specific IRS exception applies. Governmental 457(b) plans, however, generally allow penalty-free withdrawals upon separation from service, regardless of the participant’s age, offering greater flexibility for those who retire or leave employment early. Non-governmental 457(b) plans may have more restrictive in-service withdrawal options.

Contribution limits exhibit both similarities and unique features. Both 401(k) and 457(b) plans share the same employee elective deferral limit and age 50 and over catch-up contribution limit for 2025, which are $23,500 and an additional $7,500, respectively. However, 457(b) plans, particularly governmental ones, offer a distinct “special catch-up” provision allowing participants within three years of retirement to potentially contribute up to twice the annual limit, or $47,000 for 2025, or the annual limit plus unused prior contributions. This is separate from the age 50 catch-up and provides a unique opportunity for increased savings in the years leading up to retirement.

Loan provisions are available in both 401(k) and 457(b) plans, generally allowing participants to borrow up to 50% of their vested balance or $50,000, whichever is less, with repayment typically required within five years. These loans allow access to funds without being considered a taxable distribution, provided repayment terms are met. The interest paid on these loans is typically returned to the participant’s own account.

Creditor protection also varies between the plans. 401(k) plans are generally covered by ERISA, which provides robust federal protection against creditors. Governmental 457(b) plans offer similar creditor protection. In contrast, non-governmental 457(b) plans are not subject to ERISA and may lack the same level of creditor protection, potentially making assets held in these plans vulnerable to the employer’s creditors in certain insolvency situations.

Both plan types offer similar tax treatment, allowing for both pre-tax (tax-deferred) and Roth (after-tax contributions with tax-free qualified withdrawals) options. This flexibility allows participants to choose the tax strategy that best suits their individual financial situation and future tax expectations. Rollover options are also largely similar, as funds from both 401(k) and governmental 457(b) plans can typically be rolled over into an Individual Retirement Account (IRA), another employer’s qualified plan, or another 457(b) plan upon separation from service. However, rolling a governmental 457(b) into an IRA would subject future withdrawals from those funds to IRA rules, including the 10% early withdrawal penalty before age 59½. Non-governmental 457(b) plans have more limited rollover options, often only to another non-governmental 457 plan.