What Is a 457 Savings Plan and How Does It Work?
Learn about the 457 savings plan: what it is, how it works, its unique features, and how to manage your contributions and withdrawals effectively.
A 457 savings plan is a deferred compensation arrangement. It allows individuals to set aside a portion of their salary, often on a pre-tax basis, into an investment account. Funds grow tax-deferred, with taxes generally postponed until distribution, providing a mechanism for retirement savings with tax advantages.
Eligibility and Plan Types
Eligibility for a 457 savings plan is tied to employment with specific organizations, common for state and local governments and certain tax-exempt organizations. The Internal Revenue Code categorizes these plans into two types: governmental 457(b) plans and non-governmental tax-exempt organization 457(b) plans.
Governmental 457(b) plans are offered by state and local government agencies, such as municipalities and public schools. Contributions in governmental plans are held in a trust, protecting them from employer creditors. Non-governmental tax-exempt organization 457(b) plans are sponsored by non-profit entities like hospitals and charities. Funds in non-governmental 457(b) plans typically remain the employer’s property until distributed, potentially subject to certain employer creditors.
A less common 457(f) plan exists, offered by tax-exempt organizations to highly compensated or management employees. Unlike 457(b) plans, 457(f) plans are ineligible deferred compensation plans with different rules for contributions and taxation. They are often used as a retention tool, with benefits typically becoming taxable upon vesting, even if not yet distributed.
Contributions and Vesting
Contributions to a 457 plan are primarily employee deferrals, often pre-tax, reducing taxable income. Some plans offer a Roth contribution option, allowing after-tax deferrals for tax-free qualified distributions in retirement. Employers may also contribute through matching or non-elective contributions, though this is less common than in other retirement plans.
Annual contribution limits for 457(b) plans are set by the IRS. For 2025, the regular employee deferral limit is $23,500. Participants aged 50 or older can make additional catch-up contributions of $7,500 in 2025, for a total of $31,000.
Governmental 457(b) plans also offer a special catch-up provision for participants nearing retirement. This allows eligible individuals within three years of their plan’s normal retirement age to contribute up to twice the regular annual limit, provided they are not simultaneously using the age 50 catch-up. Under the SECURE Act 2.0, a higher catch-up contribution limit of $11,250 is available for governmental 457(b) plan participants aged 60 to 63 in 2025, for a potential total of $34,750.
Employee contributions are always 100% immediately vested, fully owned from contribution. If employer contributions are offered, they may be subject to a vesting schedule, specifying how long an employee must work before gaining full ownership. Once vested, employer contributions belong to the employee, even if employment terminates.
Withdrawals and Distributions
Funds from a 457 plan typically become accessible upon specific distributable events. Common triggers include separation from service (retirement or termination), death, or unforeseeable emergency. Some governmental plans may permit in-service withdrawals once a participant reaches age 59½, depending on plan provisions.
Tax implications of withdrawals depend on whether contributions were pre-tax or Roth. Withdrawals from pre-tax 457 plans are subject to ordinary income tax, as they grew tax-deferred. For Roth 457 accounts, qualified distributions are tax-free, as made with after-tax dollars. All withdrawals are generally included in taxable income, unless a tax-free rollover occurs.
Participants have various options for receiving distributions, including lump-sum payments, installment payments, or annuities. The chosen distribution method affects tax consequences and recognized income. Required Minimum Distribution (RMD) rules apply to 457(b) plans, generally mandating withdrawals by April 1 following the year they reach age 73. An exception applies if the participant is still employed by the plan sponsor, allowing delayed withdrawals until after separating from service.
Key Characteristics
Governmental 457(b) plans notably lack the 10% early withdrawal penalty typically applied to distributions from other retirement accounts taken before age 59½. Participants separating from service can access funds at any age without this penalty, though withdrawals remain subject to ordinary income tax.
Individuals can contribute to a 457 plan concurrently with another employer-sponsored retirement plan, such as a 401(k) or 403(b). The contribution limits for 457(b) plans are separate from those of 401(k)s and 403(b)s, allowing individuals to maximize deferrals to both plans.
Governmental 457(b) plan assets can be rolled over into other qualified retirement plans, including traditional IRAs, Roth IRAs (a taxable event), 401(k)s, or 403(b)s. Transferring funds from a governmental 457(b) into an IRA subjects them to IRA rules, including the 10% early withdrawal penalty for distributions before age 59½. Non-governmental 457(b) plans have more restricted rollover options, typically only allowing rollovers to another non-governmental 457(b) plan.