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A 457(b) is a tax-deferred retirement savings plan offered by employers such as state government agencies, local government agencies and certain nonprofits. Similar to a 401(k), a 457(b) generally lets you contribute money from your paycheck before taxes are withheld for the purchase of retirement investments.
Some employers offer a Roth option that enables after-tax contributions to a 457(b). This means you don’t pay taxes on withdrawals.
Both an employee and their employer can contribute to a worker’s 457(b). However, not all employers match employees’ contributions.
Generally, an employee of a state government agency, a local government agency or certain types of nonprofits can contribute to a 457(b). Contributions, which must adhere to IRS limits, are made through payroll deductions before your money is taxed. This means your current taxable income is reduced. However, you must pay taxes on post-retirement withdrawals.
Your employer might match your contributions to a 457(b) but isn’t required to do so. In addition, they might allow catch-up contributions if you’re at least 50 years old or you’ve fallen behind on making maximum annual contributions.
An outside company, such as an investment firm, manages the 457(b) on behalf of your employer. Investment options typically are limited to mutual funds and annuities. When you participate in a 457(b), you can choose investments from a menu of alternatives.
Assets in a 457(b) can be withdrawn without any penalty when you leave your employer or if you’re 70½ years old and still working. Federal and state taxes are owed on withdrawals made before age 59½, but no tax penalties are charged.
As with a 401(k), you must begin taking required minimum distributions (RMDs) from your 457(b) on April 1 after the calendar year when you reach age 73 (unless you’re still working for the employer that’s sponsoring the plan). In 2033, the RMD age will rise to 75.
“Hardship” withdrawals from a 457(b) plan are allowed if an “unforeseeable emergency” happens and there’s an “immediate and heavy financial need.” Emergencies that may qualify for a withdrawal from a 457(b) plan include:
A hardship withdrawal can’t be taken unless you’ve exhausted other financial options. Furthermore, the IRS emphasizes that an emergency withdrawal “must not exceed the amount reasonably necessary to satisfy the emergency need.”
Among the expenses that usually don’t qualify for emergency withdrawals are:
A hardship withdrawal from a 457(b) is taxed at a 10% federal rate. Meanwhile, a hardship withdrawal from a 401(k) or a 403(b) is taxed at your regular tax rate.
In most cases, though, a hardship withdrawal from a 457(b) does not face a 10% federal tax penalty. However, a hardship withdrawal from a 401(k) or 403(b) does face a 10% tax penalty, unless you are 59½ or older or you qualify for an exemption.
Aside from an outright withdrawal, your employer may let you take out a loan from your 457(b) plan. The IRS permits loans from government-sponsored 457(b) plans but not from plans sponsored by tax-exempt nonprofits.
The borrowing limit generally is 50% of the vested balance in your account, up to $50,000. But if 50% of the vested balance is less than $10,000, you might be able to borrow up to $10,000, depending on your plan’s rules.
In most cases, a 457(b) loan must be paid back within five years through payroll deductions. If you’re borrowing money to buy a primary residence, the repayment period might be longer (such as 15 years). The loan principal and interest goes back into your account.
Before borrowing from a 457(b), seek guidance from your financial advisor about whether a 457(b) loan is the best option for reaching your financial goals.
Here are the annual contribution limits for most 457(b) plans in the 2024 tax year:
A 457(b) also might allow what are known as pre-retirement catch-up contributions. These contributions can be made in the three years leading up to your normal retirement age to compensate for contributions during that time that fell below the maximum contributions.
If you’re eligible for the 50-and-over catch-up and the pre-retirement catch-up, you can’t use both catch-ups in the same calendar year.
Here are three pros and three cons of 457(b) plans.
The key difference between 401(b) and 457(b) plans is who’s eligible to participate.
A 401(b) is geared toward employees of public schools, churches and certain tax-exempt 501(c)(3) organizations. Meanwhile, a 457(b) is designed for employees of state and local government agencies, and certain tax-exempt nonprofits.
In addition, most early withdrawals from a 401(b) are subject to tax penalties, while most early withdrawals from a 457(b) are not subject to tax penalties.
Similarities between 401(b) plans and 457(b) plans include the same annual contribution limits and 50-and-over catch-up limits.
You sign up for a 457(b) plan through your employer, which enlists an outside company to oversee investments in a 457(b). Investment options generally are limited to mutual funds and annuities. However, you are able to choose from a menu of mutual funds and annuities.
Contributions to a 457(b) are made through payroll deductions. They cannot exceed the lesser of:
If you work for a state or local government agency or a nonprofit organization, it’s worth looking into their 457(b) plan as soon as you come aboard as an employee. The sooner you start contributing, the more retirement savings you can accumulate. Plus, if you don’t contribute to your employer’s 457(b), you may be missing out on their matching contributions.
It’s generally a good idea to invest in a 457(b). It lets you grow retirement savings on a tax-deferred basis and perhaps offers matching contributions from your employer. Before deciding to set up a 457(b), you should schedule a visit with your financial advisor.
The major difference between a 401(k) and a 457(b) is that a 401(k) is offered by private employers, while a 457(b) is offered by state government agencies, local government agencies and some nonprofits.
You typically can’t withdraw money from a 457(b) while you’re still employed unless you’re:
Once you retire, you typically can receive 457(b) distributions in the form of:
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