Retirement Basics: What Is A 457(b)? (2024)

A 457(b) is a type of tax-advantaged retirement plan for state and local government employees, as well as employees of certain non-profit organizations. While the 457(b) shares a few features with the more familiar 401(k) plan, it also has some unusual features. Here’s what you need to know.

What Is a 457(b)?

A 457(b) is a tax-advantaged retirement plan primarily for civil servants, municipal employees, law enforcement officers and public safety personnel. In addition, executives at hospitals, charities and unions, as well as some independent contractors employed by state and local government bodies, may participate in 457(b) plans.

Like other employer-sponsored retirement plans, the 457(b) provides tax-efficient growth for retirement savings: You don’t pay capital gains taxes on the investments you buy and sell in your account, giving your retirement nest egg additional room for growth.

Contributions to your 457(b) are deducted from your paycheck and may be taxed in one of two ways: With a traditional 457(b), your contributions are taken out of your paycheck before taxes, lowering your overall tax bill today. When you take out money in retirement, you pay income taxes on the withdrawals.

With a Roth 457(b), you fund your account with money that’s already been taxed in exchange for tax-free withdrawals in retirement. This includes any earnings your money makes while it’s in your 457(b). Not all organizations permit you to make Roth contributions to a 457(b) account.

457(b) Contribution Limits

In 2023, the annual contribution limit for a 457(b) plan is $22,500. That limit includes both employer and employee contributions, although employers rarely contribute to 457(b) accounts. Employees aged 50 and older may make additional catchup contributions of $7,500, for a total contribution limit of $30,000 in 2023.

For 2024, the basic contribution limit is $23,000. The 2024 limit for so-called catch-up contributions—for workers age 50 and older—is $30,500.

In addition to catch-up contributions, 457(b) plans offer unique features that can help you save a lot for retirement. First, in the three years before retirement, 457(b) plans allow you to contribute up to double the annual limit or 100% of your salary, whichever is less. These additional contributions, however, cannot exceed the value of unused eligible contributions from previous years. Practically speaking, this means an employee who contributed the maximum amount allowed every year would not be able to use these extra double contributions.

For those who are able to take advantage of this provision, there are a few things to keep in mind: It requires a lot of bookkeeping to prove you’re within IRS limits, and if you’re 50 or over, you can’t use the regular catch-up contribution option during the years you’re taking advantage of double contributions.

Next, if you have access to another employer-sponsored retirement plan, like a 403(b), you are allowed to contribute the employee maximum to both plans. That means in 2023 you could contribute $22,500 to both a 457(b) and a 403(b). Be aware that if you are 50 or older, you can only use the $7,500 catch-up contribution for one plan, not both. In this example, the maximum you could contribute would be $52,500.

For 2024, your basic contribution cap is $23,000. Your catch-up contribution cap remains $7,500.

How to Invest in a 457(b)

Investment options available in 457(b) plans are generally limited to annuities and mutual funds. You can’t buy exchange-traded funds (ETFs) or individual stocks in a 457(b) account, for instance.

In practice, this may not be too different from how even those with 401(k)s invest for retirement: Most 401(k) holders invest in mutual funds anyway. As long as you’re able to purchase stock-based and bond-based index funds, you’ll be able to construct the kind of three-fund portfolio most financial advisors recommend.

Whichever portfolio structure you pick, bear in mind that you’ll generally want to have a greater percentage of stock-based funds when you’re younger and slowly switch to more conservative, bond-based investments as you age. If you’d prefer to avoid the stress and effort of picking funds on your own, look to see if your 457(b) offers target-date funds. These mutual funds invest in a mix of other mutual funds that automatically adjust over time as you get closer to your target retirement date.

If your 457(b) plan doesn’t offer the choices you need, consider diverting some (or all) of your contributions to an individual retirement account (IRA) to supplement your portfolio as you probably won’t be missing out on any sort of employer match. IRAs offer much broader investments than 457(b)s but have much lower contribution limits. If you’re intent on saving a lot for retirement, you may then have to put at least a portion of your savings in your workplace plan.

457(b) Withdrawals

Withdrawals from a 457(b) plan can be complicated. On the one hand, unlike most other tax-advantaged retirement plans, you may be able to withdraw funds in your 457(b) account penalty-free before you reach age 59 ½. This, however, only applies when you leave your employer and you still must pay applicable income taxes on anything you withdraw.

If you have not left your employer, though, your contributions are locked up more than they might be in other retirement accounts. For the most part, withdrawals really aren’t allowed unless you experience an unforeseeable financial hardship, and even then, your employer’s plan doesn’t have to allow it. That said, you may be able to take a loan from your 457(b) plan, though again this is contingent on your employer allowing it.

457(b) RMDs

As with most other employer-sponsored retirement plans, you eventually will be forced to make at least a minimal withdrawal from your retirement account. Once you reach 72, you must take the required minimum distributions (RMDs) from your 457(b), unless you are still working for the company where you hold your 457(b). If that is the case, you can defer taking RMDs until April after the year you retire.

You must start your RMDs when you turn age 70 ½ if you were born before July 1, 1949.

457(b) vs 403(b): Main Differences

Public sector employees and certain employees of non-profit organizations may have access to 457(b) and 403(b) retirement plans. Though these plans share some similarities, there are important differences:

• Employer contributions. Both plans permit employer contributions, although they’re much rarer than in 401(k)s.

• Contribution maximums. Though both 457(b)s and 403(b)s allow for the same employee contribution amount, 403(b)s allow for close to double what 457(b)s do when you consider employer contribution maxes. If you have access to both plans, remember that you can max out the employee contributions of both plans.

• Catchup contributions. Each plan offers unique catchup contribution provisions. A 457(b) allows for double-the-limit contributions within three years of the normal retirement age. The 403(b) allows additional contributions to those who have worked for the same employer for 15 years (up to $15,000 total).

• Early withdrawals. The 457(b) lets you start withdrawing money from your account as soon as you stop working for the sponsoring employer, no matter your age. Meanwhile, 403(b) plans allow standard, penalty-free withdrawals at age 59 ½, as well as limited early withdrawal exceptions, such as the Rule of 55. That said, 403(b) funds may be easier to access in a pinch while you’re still working at the sponsoring employer as 457(b)s have much tighter restrictions on withdrawals while you’re still employed.

Should You Invest in a 457(b)?

A 457(b) retirement plan can help you build wealth for the future. Its special catchup contribution allowances may be particularly valuable for those looking to grow their nest egg in the years immediately preceding retirement.

457(b)s, though, generally offer more limited investment choices and can make it harder to access your money while you still work for the employer sponsoring the plan. If you want more flexibility in investment options and withdrawal timing, consider complementing your 457(b) retirement savings strategy with an IRA or 403(b), if available.