A 457 plan is a tax-advantaged retirement savings plan available to certain government and non-profit employees, offering deferred compensation benefits.
A 457 plan is a type of non-qualified, tax-advantaged deferred-compensation retirement plan offered by government employers and certain non-profit organizations. Employees participating in a 457 plan can make contributions through salary deferrals, which are typically not subject to federal income tax until distribution. Unlike 401(k) and 403(b) plans, 457 plans are not governed by the same withdrawal restrictions. Participants can access funds without penalty upon separation from service, regardless of age. This flexibility can make the 457 plan particularly appealing for early retirees in the public sector. There are two types of 457 plans: 457(b) and the less common 457(f). The 457(b) plan is more widely used and similar to other elective deferral plans. The 457(f) plan, used primarily for highly compensated employees, includes deferred compensation that is at risk of forfeiture until a vesting event occurs. The IRS sets annual contribution limits, and catch-up contributions may be allowed for employees nearing retirement. Investments within a 457 plan grow tax-deferred, and distributions are taxed as ordinary income when withdrawn.
A 457 plan's flexible withdrawal rules offer a valuable planning tool for family offices managing the retirement assets of clients employed in government or non-profit roles. These plans allow for early penalty-free distributions, enabling optimization of lifetime tax strategies and withdrawal schedules. Additionally, understanding how 457 plan assets fit into a family’s broader wealth and retirement portfolio is critical for efficient asset allocation, risk management, and intergenerational wealth transfer discussions. This is especially relevant when clients also hold 401(k), 403(b), or taxable investments and require cohesive integration in financial projections and estate planning models.
A county employee contributes $15,000 annually to her 457(b) plan. After retiring at age 55, she begins withdrawing funds without incurring the 10% early withdrawal penalty applicable to other plans such as 401(k)s. Assuming an average return of 6% over 20 years, her 457(b) balance would exceed $500,000 due to tax-deferred growth — forming a key component of her retirement strategy.
457 Plan vs. 401(k) Plan
While both are tax-advantaged retirement savings vehicles, 457 plans are available to government and select non-profit employees, while 401(k) plans are predominantly offered by private-sector employers. One key difference is that 457 plans allow for penalty-free early withdrawals upon separation from service, regardless of age, whereas 401(k) plans typically impose a 10% penalty for withdrawals before age 59½ unless an exception applies.
Can I contribute to both a 457 plan and a 401(k) plan?
Yes, if eligible, you can contribute the maximum amount to both a 457 plan and a 401(k) plan. These limits are applied separately, effectively doubling your elective deferral capacity.
Is there an early withdrawal penalty for 457 plan distributions?
No. Unlike 401(k) and 403(b) plans, 457 plans allow penalty-free withdrawals upon separation from service at any age. However, standard income taxes still apply.
Who is eligible for a 457 plan?
Eligibility is limited to employees of state and local governments and certain non-profit organizations, typically 501(c)(3) entities. Some highly compensated individuals may also qualify for 457(f) plans in executive compensation arrangements.
