Key Takeaways
- Tax-advantaged retirement plan for public employees.
- No early withdrawal penalty after leaving job.
- Separate contribution limits from 401(k)/403(b) plans.
- Offers pre-tax and Roth after-tax options.
What is 457 Plan?
A 457 plan is a tax-advantaged, employer-sponsored deferred compensation retirement account available primarily to employees of state and local governments, as well as certain nonprofit organizations. Unlike a 401(k) or a 403(b) plan, it allows you to save for retirement through salary deferrals with unique tax and withdrawal features.
This plan helps reduce your current taxable income by allowing pre-tax contributions, while earnings grow tax-deferred until you withdraw funds after leaving your employer.
Key Characteristics
The 457 plan offers flexible savings options tailored for public sector and nonprofit workers. Key features include:
- Contribution Limits: In 2024, you can contribute up to $23,000, with additional catch-up provisions if you’re age 50 or older, or approaching retirement.
- No Overlap with Other Plans: Contributions to a 457 plan do not reduce your limits for 401(k) or 403(b) plans, allowing you to maximize retirement savings across multiple accounts.
- Withdrawal Flexibility: Unlike many retirement plans, 457 withdrawals after separation are penalty-free regardless of age.
- Investment Choices: Plans typically offer mutual funds, stocks, or exchange-traded funds such as those listed in our best ETFs guide, providing opportunities for diversified growth.
- Plan Types: Governmental 457 plans protect your assets in a trust, while non-governmental plans have different protections and eligibility rules.
How It Works
You elect to defer a portion of your salary into the 457 plan, usually on a pre-tax basis which lowers your taxable income on your W-2 form. Some governmental plans also allow Roth contributions, which grow tax-free and provide tax-free withdrawals if qualified.
Contributions accumulate and grow tax-deferred until you retire or leave your employer, at which point you can take distributions without the 10% early withdrawal penalty that applies to many other plans. You can choose lump-sum payments, partial withdrawals, or installments to suit your financial needs.
Examples and Use Cases
The 457 plan suits various public sector and nonprofit employees aiming to complement pensions or other retirement accounts.
- Public Employees: A firefighter participating in a 457 plan can defer income and access funds penalty-free upon retirement, enhancing retirement income stability.
- Nonprofit Managers: Executives at tax-exempt organizations may use a 457 plan alongside their other benefits to maximize tax-advantaged savings.
- Airlines: Employees of companies like Delta may benefit indirectly through plans linked to their pension and retirement offerings.
- Investment Selection: To diversify your 457 portfolio, consider allocations in low-cost index funds or dividend ETFs for steady income streams.
Important Considerations
While 457 plans offer significant advantages, be aware of differences between governmental and non-governmental plans, especially regarding asset protection and rollovers. Non-governmental plans may expose your funds to employer creditors.
Also, contributions are subject to annual IRS limits that adjust periodically, so staying informed about these changes is essential for maximizing your savings. Consulting your plan’s terms and working with financial professionals can help optimize your retirement strategy.
Final Words
A 457 plan offers a valuable way to boost retirement savings with tax advantages and higher contribution limits, especially if you qualify for catch-up options. Review your current retirement accounts and consider maximizing contributions to take full advantage of this benefit.
Frequently Asked Questions
A 457 Plan, specifically the 457(b) plan, is a tax-advantaged retirement savings plan available to employees of state and local governments, certain tax-exempt nonprofits, and public sector workers like police officers and firefighters.
Participants can defer a portion of their salary, usually on a pre-tax basis, which reduces their current taxable income. Governmental 457 plans may also offer a Roth after-tax option, allowing for tax-free growth and qualified withdrawals.
In 2024, the IRS limit for 457(b) contributions is $23,000 for those under 50. Participants aged 50 and older in governmental plans can contribute up to $31,000 using catch-up provisions, with additional special catch-up options for long-service employees.
Yes, contributions to a 457(b) plan do not count against 401(k) or 403(b) limits. This means you can maximize savings by contributing the IRS limits to both plans if eligible.
Governmental 457 plans are offered by state/local governments, provide pre-tax and Roth options, allow rollovers to IRAs or 401(k)s, and have funds protected from employer creditors. Non-governmental plans are for certain nonprofit employees, often restrict rollovers, and funds are owned by the employer, posing higher risk.
No, unlike 401(k) or 403(b) plans, 457(b) plans do not impose a 10% early withdrawal penalty upon separation from service, regardless of age, making them flexible for early retirees.
Investment choices usually include mutual funds, stocks, and similar options depending on the specific plan rules set by the employer or plan sponsor.
Employer contributions are possible in governmental 457 plans, but combined employee and employer contributions cannot exceed IRS limits.
