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

A 401(k) plan and a 457 plan are both types of employer-sponsored retirement savings plans that help individuals save for retirement. These plans offer tax advantages, allowing money to grow without immediate taxation, which can significantly enhance long-term savings potential. Participants contribute a portion of their salary, often on a pre-tax basis, into an investment account.

Employer Eligibility and Contribution Limits

A 401(k) plan is primarily available to employees of private sector companies and certain public sector employers. In contrast, a 457 plan is specifically designed for employees of state and local governments, as well as certain non-profit organizations. This distinction means that individuals working for a private corporation typically access a 401(k), while those employed by a city, county, or a qualifying non-profit might be offered a 457 plan.

Contribution limits for these plans are set annually by the Internal Revenue Service (IRS). For 2025, the employee elective deferral limit for both 401(k) plans and governmental 457(b) plans is $23,500. Individuals aged 50 and older are eligible to make additional “catch-up” contributions, which amount to $7,500 for both plan types in 2025. This means an employee aged 50 or older can contribute a total of $31,000 to either a 401(k) or a governmental 457(b) plan.

A further enhancement to catch-up contributions applies to those aged 60, 61, 62, and 63. For these ages, the catch-up contribution limit is $11,250 in 2025, if the plan allows. This specific provision can increase the total employee contribution for this age group to $34,750 for both 401(k) and governmental 457(b) plans. Additionally, governmental 457(b) plans may offer a special pre-retirement catch-up provision, allowing participants in the three years leading up to their normal retirement age to contribute up to double the normal limit, reaching $47,000 in 2025. This unique feature is not available in 401(k) plans.

Employer contributions also vary between the two plan types. Many 401(k) plans include employer contributions, such as matching contributions or profit-sharing contributions. The total combined contributions from both employee and employer to a 401(k) plan are capped at $70,000 for 2025, or $77,500 if including the age 50+ catch-up, and $81,250 for those aged 60-63 with the enhanced catch-up. Employer contributions are less common in 457(b) plans, and if an employer does contribute, these amounts are generally counted toward the employee’s overall contribution limit.

Withdrawal Rules and Early Access

Accessing funds from 401(k) and 457 plans before retirement age involves distinct rules, particularly regarding early withdrawal penalties. For 401(k) plans, distributions taken before age 59½ are typically subject to a 10% IRS penalty in addition to regular income taxes.

There are specific exceptions to this penalty, such as distributions for total and permanent disability, certain unreimbursed medical expenses, or separation from service at age 55 or older (or age 50 for public safety employees).

Governmental 457(b) plans generally do not impose this 10% early withdrawal penalty upon separation from service, regardless of the participant’s age. If an employee leaves their job, they can typically access their 457(b) funds without the additional penalty, though distributions remain subject to ordinary income tax. This absence of an early withdrawal penalty offers greater liquidity.

Both 401(k) and 457 plans may offer loan provisions, allowing participants to borrow against their vested account balance. For both types of plans, the maximum loan amount is generally the lesser of 50% of the vested account balance or $50,000. Repayment terms for these loans typically extend up to five years, though a longer period, such as up to 30 years, may be permitted for the purchase of a primary residence. Not all plans offer loan options, and specific terms can vary.

Required Minimum Distributions (RMDs) also apply to both types of plans. Under current rules, participants in most 401(k) and 457(b) plans generally must begin taking RMDs by April 1 of the year following the year they reach age 73. However, Roth 401(k) accounts are no longer subject to RMDs for the original account owner during their lifetime, aligning them with Roth IRAs. This RMD exemption for Roth accounts does not typically extend to governmental 457(b) plans, which generally remain subject to RMD rules.

Rollover Options and Creditor Protection

When an individual leaves their job or retires, the funds held in a 401(k) or 457 plan can typically be rolled over into other retirement accounts. For a 401(k) plan, common rollover options include transferring funds to an Individual Retirement Account (IRA), rolling them into a new employer’s qualified retirement plan, or in some cases, leaving the funds within the former employer’s plan. A direct rollover helps avoid potential tax withholding and the risk of penalties.

The rollover options for 457 plans depend on whether it is a governmental or non-governmental plan. Governmental 457(b) plans offer broad flexibility, allowing funds to be rolled over into a traditional IRA, Roth IRA, 401(k) plan, 403(b) plan, or another governmental 457(b) plan. However, non-governmental 457(b) plans have more limited rollover options, often permitting transfers only to another non-governmental 457(b) plan. It is also important to understand that funds rolled into a 457 plan from other eligible plans may retain the rules of the transmitting plan, including any 10% early withdrawal penalty that would have applied.

Creditor protection for retirement assets is another important distinction. Assets in 401(k) plans generally receive strong protection under the Employee Retirement Income Security Act (ERISA), a federal law. This protection typically shields 401(k) funds from creditors in most situations, including bankruptcy. The anti-alienation provisions of ERISA make it difficult for creditors to access these funds while they remain within the qualified plan.

Governmental 457(b) plans also typically offer robust creditor protection, often comparable to that of ERISA-qualified plans, either through similar federal provisions or specific state laws. However, non-governmental 457(b) plans typically do not fall under ERISA’s protection. This distinction means that assets in non-governmental 457(b) plans may be subject to the employer’s creditors in certain circumstances.