457(b) plans, explained: How they work & what they’re for

When it comes to workplace retirement plans, the 401(k) and 403(b) often take center stage. They’re well-known, widely used, and packed with benefits. But there’s another powerful savings option that often flies under the radar: the 457(b) plan.

Designed specifically for employees of state and local governments and certain nonprofit organizations, the 457(b) offers many of the same tax-advantaged perks as its more famous counterparts. But what sets it apart is a unique set of features that could make it an excellent tool for building your retirement nest egg.

If you’re looking to maximize your retirement savings, understanding how a 457(b) works and what makes it unique could open the door to new opportunities.

Like other workplace plans, the 457(b) plan is named after the section of the IRS code that governs its use. It's a retirement vehicle that's available to two categories of employees:

• Employees of state and local governments or public schools
• Managers or highly compensated employees at tax-exempt organizations (excluding religious organizations)

Similar to a traditional 401(k), employees contribute pre-tax money to their traditional 457(b) accounts, which grow without being taxed until withdrawals start. This means you won't pay taxes on the money until you take it out, usually during retirement.

Employers may offer a Roth 457(b) option, where contributions are made with after-tax dollars. This means you won't pay taxes on your contributions when you withdraw them, and your earnings can be tax-free if you meet distribution requirements. A Roth 457(b) might be a good choice if you’re in a lower tax bracket now but expect to be in a higher one during retirement.

If you work for a government or nonprofit entity that offers a 457(b), you may notice that your investment options look similar to other employer-sponsored plans. Typically, the organization will offer a select menu of mutual funds and—for those seeking a more hands-off investment choice—target-date funds. Some also include annuities, which typically carry higher fees but can offer a stream of income that lasts throughout your retirement.

The IRS sets annual contribution limits for 457(b) plan participants.

• If you're under age 50: You can contribute up to $23,500.
• If you're over age 50: You can contribute $23,500 with an additional catch-up contribution of $7,500 for a total of $31,000.
  

One aspect that makes 457(b) plans different is that the contribution limit is separate from those of any other plan you might have through your employer. Your employer can stipulate which plan or plans you can or cannot participate in, but if you also are able to contribute to a 403(b) plan, for example, in 2025 you can invest up to $23,500 in the 403(b)—plus an additional $23,500 into your 457(b). That can add up to an incredibly powerful way to increase your tax-advantaged retirement contributions.

457(b) plans provide a separate catch-up provision for participants within three years of their normal retirement age as defined by their plan. Workers nearing retirement can contribute up to two times the usual under-age-50 limit as long as they don't exceed the amount of the unused contributions they were eligible to make in prior years. These special 457(b) catch-up contributions also cannot be more than the employee's compensation in a given year.

These more generous limits offer a great second chance for employees who couldn't afford to maximize retirement contributions when they were younger but are looking for a way to boost their investment balance prior to retirement. Just be aware that it's a one-or-the-other proposition: If you take advantage of the special 457(b) catch-up rules, you can't use the over-age-50 catch-up amount, too. The catch-up rules for a 457(b) are more complicated than other retirement plans, so you may want to consult with a tax professional or financial advisor to know for sure how much you can contribute.

Woman working from home using laptop computer while reading text message on mobile phone

Woman in home office during Covid-19 lockdown

Are your retirement savings on track?

Each decade of your working life serves as a guide to navigating the nuances of creating a strong retirement plan. We explore retirement saving guideposts in your 30s, 40s, 50s and 60s.

Let's go

One potential downside for individuals with a 457(b) is that it can be difficult to access funds before retirement. For example, you're generally not allowed to make a withdrawal while still working for the plan sponsor. And often you can't take out a loan like you can with many 401(k) plans. But in certain cases, your employer and plan may offer what's called a hardship distribution in the event that an unforeseeable emergency arises related to you or your family's health and well-being, such as:

• You, your spouse or your dependents are affected by an illness or injury.
• You incur property loss due to an event outside your control, such as severe weather.
• You need to pay funeral costs following the death of your spouse or dependent.

You can also take an early distribution if you leave your job or your employer terminates the plan. Like with other retirement plans, traditional 457(b)s are also subject to required minimum distributions, or RMDs.

Your RMD age will depend on the year you were born:

• If you turn 73 before 2033, your RMD age will be 73.
• If you turn 74 after 2032, your RMD age will be 75.
  

The amount of your RMD is based on your account balance and your actuarial life expectancy. The IRS has worksheets you can use to determine this amount.

Unlike 401(k)s and 403(b)s, there's no 10% withdrawal penalty if you qualify for one of the aforementioned exceptions and take money out before age 59½. That can make drawing from your retirement account an enticing proposition if you face financial hardship. Just remember that doing so can erode a source of income that you likely will need for retirement and prevent those funds from potentially growing over time.

Depending on the individual plan, you may be able to access your funds any time after you end your employment with the plan sponsor. You often can do this through a lump-sum payout, a series of installments or a combination of both. Some plans also allow you to convert your balance into an annuity that provides a guaranteed income stream for the remainder of your life and potentially the life of your spouse.

Should you separate from the employer sponsoring your 457(b) plan, you have a few options. Among them are withdrawing your funds or simply leaving them in the plan.

You also may be able to roll the account into an individual retirement account (IRA) or a new employer's plan, such as a 401(k) or 403(b). However, this option is only available to qualified plan participants—that is, employees of state or local governments. Nongovernmental 457(b) plans are considered nonqualified because they're only available to certain employees. Therefore, the IRS doesn't allow you to roll those funds into another retirement plan unless it's also a 457(b).

A thoughtful savings strategy is key to securing your financial future and having the freedom to give back in retirement. To ensure you’re on track with the right plan for your goals, reach out to a local financial advisor. They can help you navigate your options and create a retirement strategy tailored to your needs.