What Is the Difference Between a 401k and a 457?

Both 401(k) and 457 plans are employer-sponsored retirement savings plans designed to help individuals save for the future with tax advantages. Contributions grow tax-deferred, with taxes typically paid upon withdrawal in retirement. While sharing the goal of fostering retirement savings, they serve different workforce segments and operate under distinct rules.

Plan Sponsorship and Eligibility

A key distinction lies in the type of employer sponsoring the plan. Private sector companies typically offer 401(k) plans. Eligibility for a 401(k) often includes requirements like a minimum age (e.g., 21) and a period of service (e.g., one year), though specific criteria can vary by plan. Many 401(k) plans offer both traditional (pre-tax) and Roth (after-tax) contribution options.

In contrast, 457 plans are generally available to employees of state and local government entities (457(b) governmental plans) or, less commonly, to select management or highly compensated employees of certain tax-exempt organizations (457(b) non-governmental plans). The rules for these two types of 457 plans differ significantly, especially regarding asset protection and distribution flexibility.

Contribution Rules

Contribution limits for both 401(k) and 457 plans are set by the Internal Revenue Service (IRS). For 2025, the standard employee contribution limit for both plan types is $23,500. Individuals aged 50 and older are permitted to make additional “catch-up” contributions. For 2025, this age-based catch-up contribution is $7,500 for both 401(k) and governmental 457 plans, increasing the total potential contribution to $31,000.

An enhanced catch-up contribution applies to individuals aged 60, 61, 62, and 63. For 2025, this group may contribute an additional $11,250 to their 401(k) or governmental 457 plans, if the plan allows, potentially raising their total to $34,750. Additionally, 457 plans offer a unique “special catch-up” provision. This allows participants in the three years prior to their designated retirement age to contribute up to double the regular limit, potentially allowing a maximum deferral of $47,000 in 2025.

In 401(k) plans, employer matching and profit-sharing contributions are common. These contributions, combined with employee deferrals, are subject to an overall limit. For 2025, the total combined employee and employer contribution limit for a 401(k) is $70,000, or $77,500 if age 50 or older, and $81,250 for those aged 60-63. Employer contributions to 457 plans are less frequent or structured differently, and for 457(b) plans, employer contributions count towards the employee’s overall limit.

Accessing Your Funds

Accessing funds before retirement age differs significantly between 401(k) and 457 plans. For a 401(k), penalty-free withdrawals are generally permitted at age 59½. Withdrawals before this age typically incur a 10% early withdrawal penalty, in addition to ordinary income taxes. However, the IRS provides several exceptions to this penalty. These include withdrawals due to total and permanent disability, unreimbursed medical expenses, separation from service at or after age 55, or qualified birth or adoption distributions.

In contrast, governmental 457(b) plans offer more flexible access to funds upon separation from service. Participants can generally withdraw funds at any age after leaving employment without the 10% early withdrawal penalty that applies to 401(k)s. While the penalty is waived, withdrawals are still subject to ordinary income tax. Non-governmental 457(b) plans have stricter withdrawal rules, often requiring separation from service and typically not sharing the same penalty exemption.

Both 401(k) and 457 plans may offer loan provisions, allowing participants to borrow against their vested account balance. The maximum loan is the lesser of 50% of the vested balance or $50,000. These loans must be repaid with interest within five years, or longer if used for a primary residence. While 401(k) loans are widely available, loan options from 457 plans, especially non-governmental ones, can be less common or have specific plan rules.

Moving Your Funds

When an individual changes jobs or retires, the ability to move retirement funds to another account is an important consideration. Funds from a 401(k) plan can typically be rolled over to a Traditional Individual Retirement Account (IRA) or another employer’s 401(k) plan. If the 401(k) includes Roth contributions, these can be rolled into a Roth IRA without tax implications.

A direct rollover, where funds are transferred directly between financial institutions, is generally recommended to avoid mandatory tax withholding. An indirect rollover, where the funds are received by the participant, typically results in a 20% mandatory federal income tax withholding, and the full amount must be redeposited into a new retirement account within 60 days to avoid taxes and penalties.

Rollover options for 457 plans depend heavily on whether the plan is governmental or non-governmental. Governmental 457(b) plans offer considerable flexibility for rollovers. Funds from these plans can be rolled over to a Traditional IRA, Roth IRA (subject to taxation on pre-tax amounts), 401(k), 403(b), or another governmental 457(b) plan. This broad flexibility allows participants to consolidate their retirement savings or access a wider range of investment options.

In contrast, non-governmental 457(b) plans have more restrictive rollover rules. Funds from these plans can generally only be rolled over to another non-governmental 457(b) plan of a tax-exempt organization. They typically cannot be rolled over into an IRA or a 401(k) plan. This limitation means that individuals with non-governmental 457(b) plans have fewer options for moving their retirement savings if they leave their employer.