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What is a 457 Plan?
A 457 Plan is a tax-advantaged retirement savings plan available to employees of state and local governments, and certain non-profit organizations, allowing them to defer a portion of their salary into investment accounts for retirement.
Key takeaway: The 457 Plan provides government and non-profit workers with a flexible, tax-deferred way to build retirement savings, often alongside or instead of a 401(k) or 403(b) plan.
Definition
A 457 Plan is a deferred compensation retirement plan that allows eligible public sector or non-profit employees to contribute pre-tax income toward long-term retirement investments.
Why It Matters
The 457 Plan is essential for employees outside the private sector because it offers similar benefits to a 401(k) while allowing additional savings flexibility. It supports long-term financial security, encourages consistent contributions, and can supplement pension benefits.
Key Features
- Available to employees of state and local governments and select non-profits.
- Contributions are made on a pre-tax basis, reducing taxable income.
- Investment earnings grow tax-deferred until withdrawal.
- No early withdrawal penalty if separating from service after age 55 (unlike 401(k)s).
- May be paired with other retirement plans for increased savings.
How It Works
- Enrollment: Employees enroll through their organization’s retirement plan provider.
- Contribution: A percentage of each paycheck is invested pre-tax.
- Investment Growth: Funds grow tax-deferred through mutual funds or similar investments.
- Withdrawal: Distributions are taxed as income upon retirement.
- Portability: Balances can often be rolled into an IRA or another eligible plan when changing jobs.
Types
- Governmental 457(b): For state and local government employees.
- Non-Governmental 457(b): For executives at tax-exempt organizations.
- 457(f): For highly compensated employees with deferred compensation beyond standard limits.
Comparison Table
| Feature or Aspect | 457 Plan | 401(k) |
|---|---|---|
| Eligibility | Government and non-profit employees | Private sector employees |
| Tax Treatment | Pre-tax contributions | Pre-tax or Roth options |
| Early Withdrawal Penalty | None after job separation | 10% before 59½ |
| Employer Match | Possible, but less common | Common |
| Contribution Limit (2025) | $23,000 + catch-up | $23,000 + catch-up |
Examples
- A city employee contributes 10% of their salary to a 457(b), reducing taxable income and building retirement savings.
- A non-profit director uses a 457(f) to defer additional income beyond the standard limit.
- A state worker nearing retirement withdraws from their 457(b) without penalty upon leaving service.
Benefits and Challenges
Benefits
- No early withdrawal penalty upon separation.
- Reduces taxable income.
- Flexible contribution and withdrawal options.
- Complements pension and other retirement accounts.
Challenges
- Limited to government and non-profit employees.
- Fewer investment choices compared to private plans.
- Employer match less common.
Related Concepts
- 401(k): Private sector retirement savings plan.
- 403(b): Retirement plan for non-profit and educational institutions.
- Pension: Defined benefit plan paying fixed retirement income.
FAQ
Who is eligible for a 457 Plan?
Employees of state, local, and certain non-profit organizations.
What are the contribution limits for 457 Plans?
As of 2025, employees can contribute up to $23,000 annually, plus a $7,500 catch-up for those over 50.
Can I withdraw from a 457 Plan early?
Yes, if you separate from service, you can withdraw without penalty regardless of age.
Is the 457 Plan better than a 401(k)?
It depends on employment type—government workers benefit more from 457 Plans due to flexibility, while private sector employees use 401(k)s.
Sources and Further Reading
- IRS 457(b) Overview: https://www.irs.gov/retirement-plans/457b-plans
- U.S. Department of Labor: https://www.dol.gov/general/topic/retirement/typesofplans
- Investopedia: https://www.investopedia.com/terms/1/457plan.asp
Quick Reference
- Deferred Compensation: Income set aside for future payment, usually at retirement.
- Catch-Up Contribution: Extra amount older workers can add to retirement plans.
- Pre-Tax Contribution: Money invested before income tax is applied.
