What Is a 457(b)?

No matter who you are, it’s important to begin planning for retirement as soon as possible. One can accomplish this through various means, including setting up income sources or by saving and investing in a tax-advantaged account. If you’re a public sector employee, a common option may be a 457(b) plan, which allows you to set aside funds from your paycheck for when you leave your job.

In this article, we’ll explain what a 457(b) plan is and how it works. You’ll learn who is eligible for the plan and how contributions work. We’ll also outline the benefits and disadvantages of investing in such an account. This will help you decide if the plan is right for you.

How a 457(b) Works

A 457(b) is a deferred compensation retirement plan that exists for both state and local government employees. The account allows individuals to automatically deduct funds from their pay to contribute to the account. Then, earnings grow tax-deferred until the employee decides to withdraw funds. Typically, this is either when they leave their job or retire.

As mentioned, 457(b) plans are for governmental workers at the state or local level. Additionally, the plan may be offered to non-governmental workers of eligible tax-exempt organizations, such as a university. These categories may refer to many types of professionals, including:

• Police officers
• Firefighters
• Civil servants
• College employees

Each year, 457(b)s come with a hefty contribution limit. As of 2024, you may defer the lesser of $23,000 or 100% of your includible compensation for the year. The latter refers to any taxable wages, including benefits, you have. For those 50 or over, you may make annual catch-up contributions of $7,500.

Within the 457(b), you’ll have a set of investments to choose from. This typically includes annuity contracts and various mutual funds, which you can use to diversify your portfolio as you see fit. By investing within the account, you allow your money to grow through compound interest. However, you also accept the risk that you may lose money by doing so.

You may withdraw funds from your plan without penalty if you’ve left your job or retired. In all other cases, you must wait until age 59.5 years to pull money from the account.

Governmental vs. Non-Governmental Plan

Depending on where you work, your 457(b) plan will fall into one of two categories – governmental or non-governmental. The former refers to plans that are sponsored by government entities, whereas the latter represents those that aren’t. Each type of plan differs in the rules it has in place, which may impact how your account works.

Governmental 457(b) plans are those sponsored by government entities, such as a state or city department. This type of plan operates much like other retirement plans, allowing you to deduct a portion of your pay from the account. However, you’re subject to vesting policies (which depend on the employer) in this arrangement. These plans also allow you to roll your funds into another retirement plan, such as a 401(k) or 403(b).

Non-governmental 457(b) plans are programs sponsored by tax-exempt employers, such as non-profit organizations or universities. Unlike a governmental plan, you may need to opt into the plan to enroll, rather than already be placed into it. Also, you aren’t able to roll your funds into other retirement plans. This is because the employer owns the account, not you.

Difference Between a 457(b) and a 403(b)

Another common type of retirement plan for some state workers is a 403(b). This operates similarly to a 457(b), having the same contribution limits and similar investment options, but it’s generally for schoolteachers and employees of certain non-profit organizations. 403(b)s also typically allow for employers to make contributions, while 457(b) plans don’t.

Erika Kullberg, attorney and personal finance expert, explains that “the main difference between [the two plans] is their penalty clauses and catch-up provisions.” She adds that “[in] contrast to the 403(b), there are no penalties for early withdrawals from the 457(b), other than normal income taxes, as long as the employee separates from service before 59½.”

So, which one is right for you? This largely depends on your financial goals, including when you want to retire. Kullberg expands upon this, explaining that a “457(b) might be preferable for someone who thinks they will need early access to their money, while [a] 403(b) could be better for someone who wants a broader fund investment menu or the Roth choice.”

457(b)	403(b)
Meant for state and local government employees, as well as tax-exempt organizations.	Meant for public school and non-profit employees.
Allows you to contribute up to $23,000 in 2024.	Allows you to contribute up to $23,000 in 2024.
Funds grow tax-deferred	Funds grow tax-deferred
May withdraw funds before 59.5 if you retire or leave your job.	May only withdraw funds at 59.5 years of age or you’ll incur a 10% penalty.
Employers typically don’t match contributions.	Employers often match contributions.

Pros and Cons of 457(b)s

A 457(b) plan is a useful tool that can help you save for retirement. It allows you to build your funds over time through compound interest, as well as withdraw money much earlier than other similar types of plans. It also grants you tax advantages by deferring what you owe and offering a tax deduction for contributions.

However, despite these positives, the 457(b) has some downsides you should be aware of. According to Kullberg, it’s possible that “some plans, especially plans offered by smaller employers, might have fewer investment options than other retirement accounts.”

Below is a breakdown of the pros and cons of the 457(b) plan:

Role of 457(b) in Overall Retirement Plan

Typically, one must plan to have about 70% of their pre-retirement income once they stop working to live comfortably or maintain the same lifestyle. To accomplish this, it’s wise to combine multiple income sources to facilitate a more well-rounded retirement plan. One of these may be from a 457(b), provided you’re a government worker or an employee of an eligible organization.

When you use a 457(b) to retire, you would normally do so “in conjunction with other retirement accounts, such as an IRA or a 403(b), to provide comprehensive coverage of retirement needs,” says Kullberg. Additionally, rather than pulling money out of the account all at once, “[strategic] use of a 457(b) can help ensure that you have sufficient funds when you retire, allowing for a more flexible and phased approach to retirement.” Retirees may also wish to factor in other income sources beyond tax-advantaged accounts, such as their social security or annuities.

Retirement planning is an important task that requires significant work. We recommend hiring a financial advisor, such as a certified financial planner (CFP) or chartered retirement planning counselor (CRPC), to chart out your post-work income and ensure you live a comfortable lifestyle. To jumpstart your search for a professional near you, consider using this free matching tool, which will pair you with someone that suits your needs.

Frequently Asked Questions

What are the disadvantages of a 457(b) plan?

457(b) plans, while useful, have some downsides. One is that they typically don’t include employer matching, which can downsize your contributions. Additionally, the plans only offer a limited selection of investments, such as mutual funds or annuity contracts.

Can I borrow from my 457(b)?

Some plan sponsors may allow you to take a loan from your retirement account. The first logical step is to be sure that your employer allows such an action. If you are able, the Internal Revenue Service (IRS) limits the amount you can take to the lesser of 50% of your total balance or $50,000.

Can I roll a 457(b) into a 401(k)?

If your plan is a governmental 457(b), you will be able to roll your funds over to a 401(k) or similar retirement account. But, if you have a non-governmental account, you won’t be able to do so.

Do employers match 457(b) contributions?

Unlike a 403(b) or 401(k), most employers don’t match 457(b) contributions. This is one of the most notable disadvantages of this type of retirement plan because it can lessen how much you have in your count in comparison to other account types.

What is the maximum contribution for a 457(b)?

In 2024, the maximum contribution for your 457(b) is $23,000 or 100% of your includible income, whichever is less.