What Is a 457(b) Plan?

How a 457(b) Plan Works

You can think of the 457(b) plan like a 401(k) or 403(b) for a government or tax-exempt organization worker, although there are a few key differences having to do with early distributions and contribution options that may make a 457(b) even better for some people.

Also known as a deferred compensation plan, a 457(b) plan is offered to state and local government employees such as police officers, firefighters, or other civil servants. Some highly paid executives at certain nonprofits like hospitals, charities, and unions are also able to use 457(b) plans.

A 457(b) plan is offered through your employer, and contributions are taken from your paycheck on a pre-tax basis, which lowers your taxable income. You'll pay taxes at ordinary income rates when you withdraw the money.

Typically 457(b) plans only offer two types of investments—annuities and mutual funds—and your earnings will grow on a tax-deferred basis. You have a lot more investment choices in a traditional or Roth IRA, so if you want more options, you may want to think about putting some of your retirement savings into one of those vehicles instead.

Some employers also offer a Roth version of a 457(b), which allows after-tax contributions. Those funds and their earnings are not taxed again.

Contribution Limits of a 457(b) Plan

Participants in a 457(b) plan can generally contribute as much as 100% of an their salaries, or $22,500 for tax year 2023 ($20,500 for tax year 2022)—whichever is less.

Catch-Up Contributions

If you're age 50 or older and your employer allows catch-up contributions, your contribution limit increases by an additional $6,500 for tax year 2022 and $7,500 for tax year 2023.

Another key advantage of 453(b) plans is that you may be able to make higher catch-up contributions three years before retirement age if your plan permits you to use the Special 457(b) catch-up contribution. This catch-up strategy allows you to contribute either twice the annual limit—meaning up to $45,000 for tax year 2023 ($41,000 for 2022)—or the current year's ceiling added to whatever you haven't used in previous years.

Combining Plans

Another benefit to 457(b) plans is that they work well with other plans. Teachers, for example, might be offered both 403(b) and 457(b) plan options. If you have a combination of two plans—a 457(b) and a 403(b) or a 457(b) and a 401(k)—you can contribute the maximum amount to both plans.

That brings your annual elective deferral limit up to $45,000 for tax year 2023 (the maximum contributions allowed for tax year 2022 for 401(k) and 457(b), added together), even if you're younger than 50. The combined max is $41,000 for tax year 2022. This does not include catch-up contributions or any applicable employer matching.

457(b) Plans and Employer Matching

Employers can match the amount that you contribute to a 457(b) plan up, but in practice, very few do. Most government organizations offer pensions as well, and treat the 457(b) as a supplemental savings plan for employees.

If your employer does offer a match, it counts toward your contribution limit, unlike with a 401(k). So, for example, if your employer chips in a total of $6,000 in 2023 to your 457(b) plan, you can only contribute up to $16,500 if you're under 50 years old. Together, you can't go over the $22,500 limit.

Early Withdrawals from 457(b) Plans

Although 457(b) plans allow you to take early distributions without paying a penalty if you retire early, withdrawing for other reasons before you hit age 59 1/2 is more challenging. Unlike 401(k) plans, which waive penalties if you withdraw money to buy a first home or to pay for a dependent's tuition, you can only take out money penalty-free from a 457(b) for an unforeseen emergency.

The circumstances must be extraordinary and resulting from events beyond your control. Some examples:

• You, your beneficiary, or your spouse or dependent children get seriously ill or have an accident that requires medical costs not covered by insurance.
• You have to repair you principal residence from natural-disaster damage not covered by insurance.
• You need to pay for funeral expenses for your spouse or dependent.

However, you may be able to take out a loan from your 457(b) if your plan permits it. The most you can borrow is half of the vested account balance, up to $50,000. But if your balance is less than $10,000, you can take out all of it if your plan allows it. You have to repay the loan within five years in payments that are at least once a quarter.

Pros and Cons of a 457(b) Plan

457(b) vs. 403(b)

How are 457(b) plans and 403(b) plans similar—and how are they different?

Both are often offered by public-sector and nonprofit organizations, which typically don't offer 401(k) plans. With both plans, you can contribute up to $22,500 for tax year 2023 ($20,500 for tax year 2022). And if you're over the age of 50, you can contribute an additional $7,500 in 2023 ($6,500 for 2022).

The main difference typically has to do with who can gain access to them. 457(b) plans are usually provided to state and local government employees. 403(b) plans are mainly offered to private nonprofits and public school employees.

It's also worth noting that 403(b) plans have a total contribution limit of $66,000 for 2023—the $22,500 you can contribute as an employee, plus contributions from your employer, plus catch-up contributions. If you have a 457(b) and your employer contributes (which isn't common), their contributions count toward the $22,500 limit in 2023.

Frequently Asked Questions (FAQs)