A 457 plan is a type of non-qualified deferred compensation retirement plan that is sponsored by a state or local government, or by some non-governmental employers such as non-profit organizations. The plan is named after the section of the Internal Revenue Code that governs these plans.

A 457 plan allows eligible employees to set aside a portion of their salary on a pre-tax basis into the plan, similar to a 401(k) plan. The funds in the plan can grow tax-free until they are withdrawn, usually at retirement. Contributions to the plan are typically made by the employee, although some employers may also choose to make contributions.

One of the main features of a 457 plan is that it has more flexible withdrawal options than a traditional 401(k) plan. Participants can start taking distributions from their 457 plans as early as age 55, without penalty. Additionally, there are also no required minimum distribution (RMD) rules that apply to 457 plans. However, 457 plans are not as widely used as 401(k) plans and the contribution limits are generally lower than the 401(k) plans.

Types of 457 Plan

457 plans are a type of non-qualified deferred compensation retirement plan that are sponsored by state or local governments, and by some non-governmental employers such as non-profit organizations. There are two main types of 457 plans:

  1. The 457(b) plan: This is the most widely used 457 plan and is offered to state and local government employees and nonprofit organizations. It is a retirement savings plan that offers tax advantages to participants, similar to 401(k) plans.
  2. The 457(f) plan: This plan is offered exclusively to highly compensated executives in tax-exempt organizations. It is a supplementary plan to the 457(b) and is essentially a deferred salary plan. The purpose of this plan is to provide a retirement savings option for executives on top of their regular salary.

Both types of plans allow eligible employees to set aside a portion of their salary on a pre-tax basis into the plan and the funds grow tax-free until they are withdrawn, usually at retirement. Contributions to the plans are typically made by the employee, although some employers may also choose to make contributions. However, compared to 401(k) plans, 457 plans have more flexible withdrawal options and no required minimum distribution (RMD) rules.

The 457(b) Plan and Limits

The 457(b) plan is primarily offered to government employees, including civil servants, police personnel, and employees of other government agencies, public services, and nonprofit organizations such as hospitals, churches, and charitable organizations.

It functions similarly to a 401(k) plan, where participants set aside a percentage of their salary into a retirement account and have the option to choose how their money is invested from a list of options, usually mutual funds and annuities. The account grows in value tax-free until the employee retires, at which point taxes will be due on the amount withdrawn.

Employees are allowed to contribute up to a certain amount of their salary, which is determined by the dollar limit set for the year. The contribution limit for the 457(b) plan is usually less than 401(k) plans.

Contribution Limits:

As of 2022, employees can contribute up to $20,500 per year to 457 plans. This limit increases to $22,500 for 2023. In some cases, workers may be able to contribute more. For example, if an employer allows catch-up contributions, workers over the age of 50 may contribute an additional $6,500 a year, increasing the maximum contribution limit to $27,000 ($20,500 + $6,500) in 2022. This catch-up contribution limit increases to $7,500 for the 2023 tax year, making the maximum contribution limit $30,000 ($22,500 + $7,500).

Additionally, 457(b) plans feature a “double limit catch-up” provision, which is designed to allow participants who are nearing retirement to compensate for years in which they did not contribute to the plan but were eligible to do so. Under this provision, employees who are within three years of retirement age may contribute up to $41,000 in 2022 and up to $45,000 in 2023.

Pros and Cons of a 457(b) Plan


  1. Benefits on Tax: A 457(b) plan offers the option for traditional or Roth contributions. If a traditional plan is chosen, the contributions are made on a pre-tax basis, meaning that the amount is subtracted from the employee’s gross income, effectively lowering the taxes paid for that year. For example, if an employee named Alex earns $4,000 per month and contributes $700 to a 457(b) plan, Alex’s taxable income for the month would be $3,300.Employees have the freedom to invest their contributions in their choice of mutual funds from a selection provided. All interest and earnings generated from year to year are not taxed until the funds are withdrawn, which is typically at retirement.
  2. penalty-free withdrawals: One of the main differences between the 457(b) plan and other tax-advantaged retirement plans is the option for penalty-free withdrawals in certain circumstances. Unlike most retirement plans, if an employee retires early or resigns from their job, they can withdraw funds from their 457(b) plan without incurring a 10% penalty from the IRS. This is an exception to the general rule of early withdrawal penalty for most retirement plans, which are subject to penalties except for certain hardship reasons. However, the list of acceptable reasons for penalty-free withdrawals is limited to “unforeseeable emergencies.”It’s worth noting that the penalty on early withdrawals was waived for two years during the COVID-19 pandemic. Additionally, a 457(b) account holder can take a penalty-free withdrawal without changing jobs, similar to a 401(k) account holder.


One of the benefits of most tax-advantaged retirement savings plans is the employer match. Employers may choose to match a portion of an employee’s contribution to the plan, effectively providing the employee with additional funds for their retirement savings. For example, if an employer matches the first 3% of an employee’s contribution, it is equivalent to the employee receiving a 3% raise.

Employers can choose to match their employees’ contributions to a 457(b) plan, but in practice, this is not a common practice. If an employer does decide to match contributions, the employer contribution counts towards the maximum contribution limit for the plan. This is different from 401(k) plans, in which employer contributions do not count towards the contribution limit.

For example, in 2022, if an employer contributes $10,000 to a 457(b) plan, the employee can only add an additional $10,500 until the $20,500 contribution limit is reached (unless the employee is eligible to use the catch-up option).

Difference Between 457(b) vs. 403(b)

The 403(b) plan is similar to the 457(b) plan, as it is primarily offered to public service employees, specifically public school teachers.

It was first created in the 1950s and originally only offered an annuity option to participants, but now offers the choice to invest in mutual funds as well. Over time, the 403(b) plan has evolved to resemble the private sector’s 401(k) plan, although the investment options available to participants are typically more limited.

The annual contribution limits for the 403(b) plan are the same as those for the 457(b) and 401(k) plans.

If you are a public employee, your employer may offer a 457(b) or a 403(b) plan as a retirement savings option.

Difference Between a 457(b) Plan and a 457(f) Plan

The 457(b) plan is a version of the 401(k) plan that is specifically designed for public and nonprofit workers. It allows employees to save for retirement while deferring the tax bill until they retire and begin withdrawing the money. There is also a Roth version available, which is offered at the employer’s discretion, it takes the taxes upfront, so no taxes are usually due on withdrawals.

The 457(f) plan, also known as a Supplemental Executive Retirement Plan (SERP), is a retirement savings plan that is exclusively offered to the highest-paid executives in the tax-exempt sector. It is often used in organizations such as hospitals, universities, and credit unions.

A 457(f) plan is a supplement to a 457(b) plan. Employers make additional contributions to the employee’s account beyond the usual limits, which are negotiated by contract and are equivalent to a deferred salary adjustment.

If the executive resigns before the established vesting period, the 457(f) contribution will be forfeited. The plan is intended as an executive retention strategy, commonly known as “golden handcuffs.”

Which Is Better 457(b) Plan or the 401(k) Plan?

A 457(b) plan is similar to a 401(k) plan in terms of its tax advantages and investment options. If you work for a public agency or nonprofit organization, it is likely a great option for retirement savings.

When choosing a traditional plan over a Roth plan, your contributions will be made on a pre-tax basis, which can lower your taxable income each year while your money is invested in a long-term account. The money will not be taxed until you retire and start making withdrawals.

On the other hand, a Roth plan will require you to pay taxes upfront, but the deposited funds and the profits earned over the years will not be taxed upon withdrawal.

One potential downside of a 457(b) plan is that your employer may not match your contributions, but this is not a universal rule, and it is not unique to the nonprofit sector.

Withdrawals From 457(b) Account?

A key benefit of a 457(b) plan is that you are allowed to take early withdrawals without incurring a tax penalty in certain circumstances, such as an “unforeseeable emergency.” While it is not advisable as it depletes your retirement savings, it can be a useful option in unexpected situations. However, it is important to note that you will owe income tax for the year on the amount withdrawn.

You are required to start taking withdrawals from your account at age 72, and the minimum amount you must take is determined by an IRS worksheet.