What Is a 457(b) Retirement Plan & How Does It Work?

A 457(b) retirement plan is a deferred compensation arrangement, primarily offered by state and local government entities and certain tax-exempt organizations. It allows eligible employees to save for retirement on a tax-advantaged basis, with contributions and investment earnings growing tax-deferred until distribution.

Eligibility and Plan Structures

457(b) plans are available to employees of state and local government entities, including law enforcement, civil servants, and public university workers. Additionally, certain tax-exempt organizations, such as hospitals, charities, and private universities, can offer 457(b) plans to their eligible employees.

Governmental 457(b) plans are sponsored by government entities. Contributions made to these plans are held in a trust, which provides protection from the employer’s creditors. These plans are broadly available to public sector workers and offer tax-deferred growth, meaning taxes are paid only upon withdrawal in retirement.

Non-governmental 457(b) plans are offered by tax-exempt organizations and have different characteristics. Unlike governmental plans, these plans are “unfunded,” meaning the assets remain the employer’s property and are subject to the claims of the organization’s general creditors. To avoid being subject to the Employee Retirement Income Security Act (ERISA) funding requirements, non-governmental 457(b) plans are limited to a “select group of management or highly compensated employees.” This limitation means that rank-and-file employees of tax-exempt organizations are generally not eligible for non-governmental 457(b) plans.

Governmental 457(b) plans offer robust asset protection through their trust structure and are broadly available to employees. Conversely, non-governmental 457(b) plans carry a default risk because assets are not held in trust for employees and are accessible by the employer’s creditors in case of financial distress. Non-governmental plans also restrict participation to a smaller, more elite group of employees.

Contribution Rules and Limits

Contributions to 457(b) plans are pre-tax, which allows participants to reduce their current taxable income. Taxes on both the contributions and any investment earnings are deferred until the funds are withdrawn in retirement. Some 457(b) plans, particularly governmental ones, may also offer a Roth contribution option, allowing after-tax contributions for tax-free withdrawals in retirement, provided certain conditions are met.

The Internal Revenue Service (IRS) sets annual contribution limits for 457(b) plans. For 2025, the standard annual contribution limit for elective deferrals is $23,500.

Participants aged 50 or older can contribute an extra $7,500 beyond the regular limit, bringing their total possible contribution to $31,000 in 2025. This age-based catch-up provision is available for governmental 457(b) plans.

A special “last three years rule” allows participants who are within three years of their normal retirement age to contribute up to double the standard annual limit. This means an eligible participant could contribute up to $47,000 in 2025. This special catch-up provision cannot be used in conjunction with the age 50+ catch-up contribution.

Employers may also make contributions to 457(b) plans. These employer contributions, when combined with employee deferrals, are subject to an overall limit under Internal Revenue Code Section 415. For 2025, the total contribution limit for both employee and employer contributions is $70,000, or $77,500 for those aged 50 or older.

Withdrawal and Distribution Rules

Distributions from a 457(b) plan can generally occur upon specific triggering events. These events typically include separation from service (such as retirement or leaving employment), death, disability, or an unforeseeable emergency. An unforeseeable emergency is defined by the IRS as a severe financial hardship resulting from an illness, accident, natural disaster, or other events beyond the participant’s control, provided other financial resources have been exhausted.

A distinct advantage of governmental 457(b) plans is the absence of the 10% early withdrawal penalty that often applies to other retirement accounts like 401(k)s and IRAs for distributions taken before age 59½. Once a participant separates from service, they can generally access their governmental 457(b) funds without this penalty, regardless of their age. However, the distributions are still subject to ordinary income tax in the year they are received.

All distributions from traditional, pre-tax 457(b) plans are taxed as ordinary income at the recipient’s federal and state income tax rates. For Roth 457(b) accounts, qualified withdrawals, typically made after age 59½ and a five-year holding period, are completely tax-free.

Participants in 457(b) plans are subject to Required Minimum Distribution (RMD) rules. Generally, RMDs must begin by April 1 of the year following the calendar year in which the participant reaches age 73, unless still employed by the plan sponsor. Failure to take timely RMDs can result in significant penalties.

Rollover options for 457(b) plans vary depending on whether the plan is governmental or non-governmental. Funds from governmental 457(b) plans can typically be rolled over into other qualified retirement accounts, such as a traditional IRA, Roth IRA, 401(k), 403(b), or another governmental 457(b) plan. This allows for continued tax-deferred growth and potential consolidation of retirement assets. However, rolling governmental 457(b) funds into an IRA means they become subject to IRA rules, including the 10% early withdrawal penalty if distributions are taken before age 59½. Non-governmental 457(b) plans have more limited rollover options, often only allowing transfers to another non-governmental 457 plan.

Loans may be permitted from some 457(b) plans, primarily governmental ones. If a plan allows loans, participants can typically borrow up to 50% of their vested account balance, or up to $50,000, whichever is less. Loan repayments are usually made through payroll deductions over a period of up to five years, though loans for a primary residence may have longer terms. If a participant leaves employment before repaying the loan, the outstanding balance may become due immediately.