# What Is a 457 Plan?

> **Definition**
>
> A 457 plan helps reduce an employee's annual income tax with pre-tax retirement savings.

## What Is a 457 Plan?

A 457 plan is a [tax-advantaged](https://www.investopedia.com/terms/t/tax-advantaged.asp) 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](https://www.investopedia.com/terms/1/401kplan.asp) in the private sector, the 457(b) allows employees to [save pre-tax earnings in an account](https://www.investopedia.com/terms/p/pretaxcontribution.asp), reducing their annual income taxes while postponing the taxes due until the money is withdrawn during retirement.

A [Roth version](https://www.investopedia.com/terms/r/roth-option.asp) 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.

### Key Takeaways

*   The 457(b) is an IRS-sanctioned, tax-advantaged employee retirement plan.
*   The plan is offered only to public service employees and employees at tax-exempt organizations.
*   The interest and earnings in the account are not taxed until the funds are withdrawn.

![457 Plan](https://www.investopedia.com/thmb/S1lp4vKskF2NDwKfF2294Mj1uuA=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/457plan.asp-final-f27170b983d0496e86a246a0c1cb4602.png)

*— Investopedia / Julie Bang*

## Contribution Limits

Employees commonly choose [mutual funds](https://www.investopedia.com/terms/m/mutualfund.asp) and [annuities](https://www.investopedia.com/ask/answers/12/what-is-an-annuity.asp) with a 457 and can contribute up to 100% of their salary up to the IRS annual limit. The IRS adjusts 457(b) contribution limits annually for inflation. There is also an optional catch-up contribution allowed for people who are 50 and older if the plan permits it. This limit is also increased and adjusted annually.  

The SECURE 2.0 Act allowed government plans to offer people in their early 60s an additional "super catch-up" contribution. So, people between 60 and 63 have the option to contribute more than the standard catch-up contribution. This limit is based on whichever is higher: a set dollar amount or a percentage of the standard catch-up.”

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.

> **Important**
>
> The SECURE 2.0 Act raised the age for taking required minimum distributions (RMDs) to 73. Those who reached age 72 in 2023 must take their first RMD on April 1, 2025.

## 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)](https://www.investopedia.com/terms/i/irs.asp).

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.

Pros

*   Looser rules for early withdrawals.
    
*   Early distributions allowed for participants who leave a job.
    
*   No taxes are due until money is withdrawn.
    

Cons

*   Employer contributions count toward contribution limits.
    
*   Employer contributions subject to a vesting schedule.
    
*   Limited investment choices compared to private sector 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)](https://www.investopedia.com/articles/personal-finance/111615/457-plans-and-403b-plans-comparison.asp) began in the 1950s when it exclusively offered an [annuity](https://www.investopedia.com/terms/f/fixedannuity.asp) to participants.

Participants can still create an annuity or choose to invest in mutual funds. 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.

## What Is the Difference Between a 457(b) Plan and a 457(f) Plan?

The 457(b) plan is a version of the 401(k) plan designed for public and nonprofit workers. It helps employees save for retirement while deferring the tax bill until they retire and withdraw the money. The 457(f) plan is also known as a [Supplemental Executive Retirement Plan (SERP)](https://www.investopedia.com/terms/s/serp.asp). It is a retirement savings plan for only the highest-paid executives in the tax-exempt sector. They are mostly employed in hospitals, universities, and credit unions. A 457(f) supplements a 457(b).

## Is a 457(b) Plan Better Than a 401(k) Plan?

A 457(b) plan compares to a 401(k) plan. Both allow workers to lower taxable income and invest in retirement savings. However, contributions made to a 457(b) may not be matched by the employer like a 401(k).

  

## How and When Can Employees Withdraw From a 457(b) Account?

Employees can withdraw without paying a tax penalty for any "unforeseeable emergency."

Retirees must take the [required minimum distribution (RMD)](https://www.investopedia.com/articles/personal-finance/020116/how-457-plan-works-after-retirement.asp) determined by the IRS. An RMD is a minimum amount that must be withdrawn from certain retirement plans, like a 457(b), each year once an individual reaches a certain age.

## 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.

> **Article Sources**
>
> 1.  Internal Revenue Service. "[IRC 457(b) Deferred Compensation Plans](https://www.irs.gov/retirement-plans/irc-457b-deferred-compensation-plans)."
>     
> 2.  Internal Revenue Service. “[Retirement Topics - 457(b) Contribution Limits](https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-457b-contribution-limits).”
>     
> 3.  Thrift Savings Plan. "[SECURE Act 2.0, Section 109: Higher Catch-Up Limit to Apply at Age 60, 61, 62, and 63](https://www.tsp.gov/bulletins/24-2/)."
>     
> 4.  Mission Square Retirement. "[457(b) Retirement Plan Catch-Up Rules & Limits](https://www.missionsq.org/products-and-services/457%28b%29-deferred-compensation-plans/457%28b%29-retirement-plan-catch-up-rules-and-limits.html)."
>     
> 5.  Internal Revenue Service. "[Retirement Plan and IRA Required Minimum Distributions FAQs](https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs)."
>     
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>     
> 7.  Internal Revenue Service. "[Comparison of Tax-Exempt 457(b) Plans and Governmental 457(b) Plans](https://www.irs.gov/retirement-plans/comparison-of-tax-exempt-457b-plans-and-governmental-457b-plans)."
>     
> 8.  United States Code. “[26 USC 457: Deferred Compensation Plans of State and Local Governments and Tax-Exempt Organizations](https://uscode.house.gov/view.xhtml?req=%28title:26%20section:457%20edition:prelim%29).”
>     
> 9.  Internal Revenue Service. "[Unforeseeable Emergency Distributions From 457(b) Plans](https://www.irs.gov/retirement-plans/employee-plans-news-december-17-2010-unforeseeable-emergency-distributions-from-457b-plans)."
>     
> 10.  Internal Revenue Service. "[Retirement Topics - Exceptions to Tax on Early Distributions](https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distributions)."
>      
> 11.  Internal Revenue Service. "[Comparison of Tax-Exempt 457(b) Plans and Governmental 457(b) Plans](https://www.irs.gov/retirement-plans/comparison-of-tax-exempt-457b-plans-and-governmental-457b-plans)."
>      
> 12.  Internal Revenue Service. "[401(k) Plan Overview](https://www.irs.gov/retirement-plans/plan-sponsor/401k-plan-overview)."
>      
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>      
> 15.  BoliColi. "[457(f) Supplemental Retirement Plans](https://www.bolicoli.com/457f-supplemental-retirement-plan/)."
>      
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>      
> 18.  Internal Revenue Service. “[Retirement Topics — Required Minimum Distributions (RMDs)](https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-required-minimum-distributions-rmds).”
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