What Is a 457 Retirement Plan and How Does It Work?

A 457 retirement plan serves as a distinct deferred compensation arrangement designed to help specific employees save for their future. This type of plan allows eligible individuals to set aside a portion of their income on a pre-tax or, in some cases, after-tax basis, facilitating tax-advantaged growth over time. Its primary purpose is to provide a supplemental retirement savings vehicle for those working in public service and certain non-profit organizations.

Defining the 457 Plan

A 457 plan is a non-qualified deferred compensation plan, meaning it does not fall under the Employee Retirement Income Security Act (ERISA) in the same way that 401(k) or 403(b) plans do. This distinction carries implications for how the plan assets are held and protected. Internal Revenue Code Section 457 outlines two primary types: governmental 457(b) plans and non-governmental 457(b) plans.

Governmental 457(b) plans are sponsored by state and local government entities, including their agencies and instrumentalities. Eligibility extends to public sector employees, such as teachers, police officers, firefighters, and other civil servants. Contributions are generally held in trust for participants, offering asset protection similar to qualified plans.

In contrast, non-governmental 457(b) plans are offered by tax-exempt organizations under IRC Section 501(c). These plans are limited to a “select group of management or highly compensated employees.” These plans are “unfunded,” where plan assets remain subject to the employer’s general creditors.

Contribution Mechanisms

Contributions to a 457 plan primarily occur through employee elective deferrals, where participants choose to have a portion of their salary directed into the plan before taxes are withheld. For 2025, the standard annual contribution limit for a 457(b) plan is $23,500. This amount is adjusted periodically by the IRS to account for inflation.

Beyond the standard limit, participants may be eligible for catch-up contributions. Individuals aged 50 or older can contribute an additional $7,500 in 2025, raising their total potential contribution to $31,000. This age-based catch-up provision is available only to participants in governmental 457(b) plans.

A special 3-year rule is available to both governmental and non-governmental 457(b) plan participants. This rule allows individuals within three years of their plan’s normal retirement age to contribute up to double the annual deferral limit, or the annual limit plus any unused deferral amounts from prior years. Confirm the specific calculation with the plan administrator.

Employer contributions to 457 plans are less common than in 401(k) plans, particularly for governmental plans. Some plans may allow for employer contributions, which also count towards the overall annual contribution limit. If employer contributions are made, they may be subject to vesting schedules, meaning employees must work a certain period to gain full ownership. Until fully vested, employer contributions could be forfeited if the employee leaves service prematurely.

Accessing Funds

Accessing funds from a 457 plan is permitted upon certain qualifying events. Typical triggers for distributions include separation from service, reaching a specified age, death, or disability. Funds may also be accessed in an unforeseeable emergency, defined by IRS regulations as severe financial hardship beyond the participant’s control.

When distributions are taken from a 457 plan, amounts are taxed as ordinary income in the year received. This applies to pre-tax contributions and any accumulated earnings. Governmental 457(b) plans have a unique advantage: distributions before age 59½ are not subject to the additional 10% early withdrawal penalty. This provides greater flexibility for those who may need to access funds earlier.

Participants in 457 plans have options for rolling over their funds. Funds from a governmental 457(b) plan can be rolled over into another governmental 457(b) plan, a 401(k), 403(b), or an Individual Retirement Account (IRA). Non-governmental 457(b) plans have more restrictive rollover rules, often limiting rollovers to another non-governmental 457(b) plan. Plan loans may also be available, allowing participants to borrow against their account balance, though terms depend on the specific plan’s provisions.

Unique Plan Characteristics

Governmental and non-governmental 457(b) plans differ in their funding status. Non-governmental 457(b) plans are “unfunded,” meaning employee deferrals and earnings remain employer assets. While employers often use “rabbi trusts” to hold these assets, they are still subject to the employer’s general creditors in bankruptcy or financial distress. In contrast, governmental 457(b) plans are “funded,” with assets held in trust or custodial accounts for participants, providing protection from employer creditors.

A notable feature of 457 plans, particularly governmental 457(b) plans, is their interaction with other retirement savings vehicles. Contributions to a 457 plan do not count against the limits of other plans, such as 401(k)s or 403(b)s, if an employee is eligible for multiple plans. This allows individuals to contribute the maximum allowable amount to both a 457 plan and another employer-sponsored plan, increasing their overall retirement savings capacity. This “double deferral” opportunity is an advantage for eligible employees.

Investment options within 457 plans are participant-directed, allowing individuals to choose how their deferred funds are invested from a menu of options provided by the plan administrator. These options include a range of mutual funds, annuities, or other investment vehicles. Specific investment choices are determined by the plan sponsor and may vary widely between different plans.