A 457 account is a retirement savings plan for government and certain nonprofit employees

A 457 account is a tax-deferred retirement savings plan offered by state and local government employers, and by some tax-exempt organizations like hospitals and universities. It works similarly to a 401(k) — you contribute money from your paycheck before taxes are taken out, the money grows without being taxed each year, and you pay income tax only when you withdraw it in retirement.

The account is named after section 457 of the Internal Revenue Code. There are two types: a 457(b) plan, which is the standard version most people encounter, and a 457(f) plan, which is less common and has different rules. This guide focuses on 457(b) plans, which is what most government employees have access to.

The main difference between a 457 and a 401(k) is who can use it. A 457 is only for public sector workers — city employees, county workers, state employees, teachers in some districts, and staff at certain nonprofits. If you work for a private company, you would have a 401(k) instead, not a 457.

Key Takeaways

  • A 457 account lets you set aside money from your paycheck before income tax is calculated, and that money grows tax-free until you withdraw it.
  • Only government employees and workers at certain tax-exempt organizations can open a 457; private sector employees cannot.
  • You can contribute up to $23,500 per year (as of 2024), and if you are within three years of retirement, you may be able to contribute significantly more through a catch-up provision.
  • Unlike a 401(k), you can withdraw money from a 457 without penalty once you leave your job, regardless of your age.
  • A 457 is not the same as a pension; it is a savings account you control, and the balance depends on how much you contribute and how your investments perform.

How contributions work and what you can set aside

You decide how much to contribute each pay period, and your employer deducts that amount from your paycheck before calculating your income tax. This reduces your taxable income for the year. For 2024, the annual contribution limit is $23,500. If you earn $60,000 per year and contribute $10,000 to your 457, you only pay income tax on $50,000.

If you are within three years of your planned retirement date, you may be able to use a catch-up provision that allows you to contribute additional money — sometimes double the normal limit. The exact amount varies by employer plan, so check with your benefits office to see if your plan offers this option and when you become may be able to access.

Your employer does not have to match your contributions. Some government employers do offer a match (typically 3 to 5 percent of your salary), but many do not. Check your plan documents or ask your HR department whether your employer contributes anything on your behalf.

Investment options and how your money grows

Once money is in your 457 account, you choose how to invest it. Most plans offer a menu of mutual funds, target-date funds (which automatically shift from stocks to bonds as you approach retirement), and sometimes a stable value fund that acts like a savings account. A few plans also offer self-directed brokerage options that let you buy individual stocks or bonds.

The growth of your account depends entirely on which investments you choose and how the market performs. If you pick aggressive stock funds, your balance could grow significantly in good years but also drop in market downturns. If you pick conservative options like bond funds or stable value funds, growth is slower but steadier. Most financial advisors suggest a mix based on your age and how many years until retirement.

You can usually change your investment choices once or twice per year, or whenever your life circumstances change significantly (like a promotion or a major expense). Some plans allow more frequent changes. Check your plan's rules or contact your benefits administrator.

Withdrawal rules and when you can access your money

The key advantage of a 457 over a 401(k) is the withdrawal rule. With a 401(k), you generally cannot withdraw money before age 59½ without paying a 10 percent penalty (plus income tax). With a 457, you can withdraw money without penalty once you separate from service — meaning you leave your job, retire, or are laid off — at any age.

You do still owe income tax on the money you withdraw, because it was never taxed when you contributed it. If you withdraw $50,000 from your 457 at age 50, you will owe income tax on that $50,000 in the year you withdraw it. The amount of tax depends on your total income that year and your tax bracket.

You can also withdraw money while still employed if you face a unforeseeable emergency — a term the IRS defines narrowly to mean things like a serious illness, a natural disaster, or imminent foreclosure. You cannot withdraw simply because you want to buy a house or pay off credit card debt. Your plan administrator decides whether your situation qualifies, and the process can take several weeks.

Required withdrawals and what happens at retirement

Once you turn 73, you must begin taking required minimum distributions (RMDs) from your 457 account each year. The IRS calculates the minimum amount based on your age and account balance. If you do not take the required amount, you face a 25 percent penalty on the shortfall (reduced to 10 percent if you correct it within two years).

You can take your money as a lump sum, as monthly or annual payments over a set period, or as payments that last your lifetime. Many people choose monthly payments so the money lasts longer and they do not face a large tax bill all at once. Your plan will have forms to set up whatever payment schedule you choose.

If you die before withdrawing all your money, your beneficiary (usually a spouse or adult child) inherits the account. They must withdraw it according to IRS rules, which vary depending on their relationship to you and the type of plan. Your plan documents should explain what happens to your account after your death.

How a 457 differs from a pension and other retirement accounts

Many government employees have both a 457 and a pension. A pension is a may provide monthly payment for life that your employer funds and manages — you do not control the investments or the amount. A 457 is different: you control how much goes in, how it is invested, and when you take it out. The balance is yours to manage.

If your employer offers a pension, it is separate from your 457. The pension is not affected by how much you contribute to your 457 or how your 457 investments perform. Some government workers have a pension plus a 457, which gives them both a may provide income stream and additional savings they control.

A 457 is also different from a traditional IRA or Roth IRA, which are individual accounts you open on your own. A 457 is employer-sponsored, meaning your employer sets up the plan and you enroll through your benefits office. The contribution limits are higher for a 457 than for an IRA, and the withdrawal rules are more flexible.

Taxes and what you owe when you withdraw

Money you contribute to a 457 reduces your taxable income in the year you contribute it. If you contribute $15,000 in 2024, you do not pay federal income tax on that $15,000. However, you still pay Social Security and Medicare taxes (called FICA taxes) on your full salary, including the amount you contribute to the 457.

When you withdraw money, you pay ordinary income tax at your current tax rate. If you withdraw $50,000 and you are in the 22 percent tax bracket, you owe $11,000 in federal income tax on that withdrawal. You may also owe state and local income tax, depending on where you live and work.

If you withdraw money before age 59½ and you are no longer employed, you do not pay the 10 percent early withdrawal penalty — that is the main advantage over a 401(k). However, you still owe regular income tax. Some people withdraw their 457 balance gradually over several years in retirement to keep their tax bracket lower each year.

Frequently Asked Questions

Can I have both a 457 and a 401(k)?

No. A 457 is only available through government or nonprofit employers, and a 401(k) is only available through private employers. You can have one or the other, but not both at the same time. If you change jobs from government to private sector, you would stop contributing to your 457 and start a 401(k) with your new employer.

What happens to my 457 if I leave my job?

Your money stays in the account and continues to grow. You can leave it there and withdraw it later, or you can roll it into an IRA or another employer plan if you change jobs. You do not have to withdraw it immediately, and you do not face a penalty for leaving it alone until you are ready to use it.

Can I borrow from my 457?

Some plans allow loans, but not all. If your plan offers loans, you typically can borrow up to 50 percent of your balance, and you repay it through payroll deductions. Check your plan documents or contact your benefits office to see if loans are available and what the terms are.

Is a 457 protected if my employer goes bankrupt?

Yes. A 457 is held in a trust separate from your employer's assets, so it is protected even if your employer faces financial trouble. Your money is yours, not your employer's property, and creditors cannot claim it.

What is the difference between a 457(b) and a 457(f)?

A 457(b) is the standard plan for most government employees and has the flexible withdrawal rules described in this guide. A 457(f) is for highly paid executives at nonprofits and has stricter rules — money is generally locked in until you leave your job or reach age 59½. Most people have a 457(b).