What Is a 457(b) Retirement Account?

A 457(b) retirement account is a deferred compensation plan offered by state and local government entities, including public schools and hospitals. Some non-governmental tax-exempt organizations, such as charities or universities, also offer these plans. Its purpose is to provide a supplemental retirement savings vehicle. Contributions are pre-tax, reducing current taxable income. Investment earnings grow tax-deferred, with taxes paid only upon withdrawal in retirement. This tax-deferred growth enhances long-term savings.

Eligibility and Account Types

Eligibility for a 457(b) plan is limited to employees of state and local government agencies, including public schools and universities. Private for-profit companies cannot offer these plans.

There are two types of 457(b) plans: governmental and non-governmental. Governmental 457(b) plans are established by state and local government employers. Assets in these plans are held in a trust or custodial account for the participants’ benefit, protecting savings.

Non-governmental 457(b) plans are offered by tax-exempt organizations. While also governed by Internal Revenue Code Section 457(b), their assets remain subject to the organization’s general creditors. This means the plan is “unfunded” for tax purposes and functions as a non-qualified deferred compensation plan. The unfunded nature of non-governmental plans means assets could be accessible by creditors if the sponsoring organization faces financial distress. This distinguishes them from governmental plans, which protect participant assets from employer creditors.

Contribution Limits and Rules

Contributions to a 457(b) account come from employee salary deferrals. Some governmental 457(b) plans also permit employer contributions, which count towards overall limits. The IRS sets annual contribution limits.

For 2025, the standard annual elective deferral limit is $23,500, or 100% of includible compensation, whichever is less. This amount adjusts for inflation.

Governmental 457(b) plan participants age 50 and older can make additional “catch-up” contributions. For 2025, the age 50 catch-up allows an additional $7,500, increasing the total limit to $31,000. This age 50 catch-up is for governmental plans only. Under SECURE Act 2.0, governmental 457(b) plan participants aged 60, 61, 62, or 63 can contribute an additional $11,250 in 2025, for a total of $34,750.

A “special 457(b) catch-up” provision is available to participants in both governmental and non-governmental plans. This allows individuals within three years of their plan’s normal retirement age to contribute up to double the standard annual limit. In 2025, this could be $47,000. The amount allowed is the lesser of twice the annual limit or the annual limit plus any unused deferral amounts from prior years. A participant cannot use both an age-based catch-up and the special 457(b) catch-up in the same year; they elect the one allowing the greater contribution.

Contributions to a 457(b) plan do not impact limits for other retirement plans like 401(k)s or 403(b)s. This independent limit allows individuals to contribute the maximum to both a 457(b) plan and another employer-sponsored plan, increasing total retirement savings.

Distribution Rules and Taxation

Funds in a 457(b) account can be distributed upon specific events. These include separation from service (retirement or termination), death, disability, or an unforeseeable emergency as defined by IRS regulations.

Governmental 457(b) plans offer an advantage: distributions taken before age 59½ are not subject to the 10% early withdrawal penalty common to other retirement accounts like 401(k)s or IRAs. This flexibility benefits those who separate from service before traditional retirement age. This penalty exemption does not apply to non-governmental 457(b) plans if the distribution occurs before severance from employment.

All distributions from both governmental and non-governmental 457(b) accounts are taxed as ordinary income when received. This is because contributions were pre-tax, and earnings grew tax-deferred. The entire withdrawal, including contributions and earnings, is added to the recipient’s taxable income.

Required Minimum Distributions (RMDs) apply to 457(b) plans. Participants must begin withdrawals once they reach the required age. The SECURE Act 2.0 increased the RMD age to 73, effective January 1, 2023, further increasing to 75 in 2033.

Upon separation from service, participants have several options for their funds. They can roll over 457(b) assets into another eligible qualified retirement plan, such as a 401(k), 403(b), or an IRA. Funds can also be rolled into another eligible 457(b) plan if the new employer offers one.