What Is a 457 Plan?

What Is a 457 Plan?

A 457 plan is a tax-advantaged retirement savings plan for many state, local government, and some nonprofit organization employees. The 457(b) is the most common type. Like a 401(k) plan in the private sector, the 457(b) allows employees to save pre-tax earnings in an account, reducing their annual income taxes while postponing the taxes due until the money is withdrawn during retirement.

A Roth version of the 457(b) plan allows after-tax contributions. The 457(f) plan is a supplemental plan offered only to highly compensated executives in tax-exempt organizations.

Contribution Limits

Employees commonly choose mutual funds and annuities with a 457 and can contribute up to 100% of their salary up to the IRS annual limit. For 2025, the 457(b) contribution limit is expected to rise to $23,500, up from $23,000 in 2024.

There is a catch-up limit of $7,500 as additional savings for those aged 50 and older. For example, if an employer permits catch-up contributions, eligible workers may save $7,500 more a year, making their maximum contribution limit $31,000 ($23,500 + $7,500) in 2025.

Section 109 of the 2022 SECURE 2.0 Act permits 457 plans to optionally offer higher catch-up contributions in 2025 for participants ages 60 to 63 before the end of the tax year. The maximum catch-up limit is the greater of $10,000 or 150% of the regular catch-up limit. Additionally, a 457 plan's "double limit" provision allows participants to contribute up to twice the annual limit for three years before the employee's normal retirement age.

Advantages and Disadvantages

A traditional 457 deducts contributions pretax, lowering workers' annual taxes. All interest and earnings generated annually remain untaxed until the funds are withdrawn. Unlike other tax-advantaged retirement plans, there's no penalty for early withdrawals with a 457. Those who retire early or resign can withdraw funds without incurring a 10% penalty from the Internal Revenue Service (IRS).

A 457 account holder can take a penalty-free withdrawal without changing jobs, like a 401(k) account holder under "unforeseeable emergencies."However, early withdrawals from a 457 are subject to a 10% penalty if the account holder rolls the funds over from a 457 to any other tax-advantaged retirement account, such as a 401(k).

One downside of a 457 plan is employers do not commonly match employee contributions. If they do, the employer contribution counts toward the maximum contribution limit. This is not the case for 401(k) plans.

457(b) vs. 403(b)

The 403(b) plan, like the 457(b), is primarily available to public service employees, such as public school teachers. The 403(b) began in the 1950s when it exclusively offered an annuity to participants.

Participants can still create an annuity or choose to invest in mutual funds. As of 2024, the 403(b) closely resembles the private sector's 401(k) plan. The annual contribution limits are identical to those of 457(b) and 401(k) plans.

The Bottom Line

A 457(b) plan is similar to a 401(k) but applies to employees of government agencies, public services, and nonprofit organizations such as hospitals, churches, and charitable organizations. The traditional version of this tax-advantaged retirement savings plan uses pretax contributions, whereas the Roth version uses post-tax contributions.