457 Plan
Key Takeaways
- A 457 plan is a deferred compensation retirement plan for state/local government and certain nonprofit employees
- Unique advantage: no 10% early withdrawal penalty for distributions at any age after leaving employment
- Contribution limits are the same as 401(k) and 403(b) plans ($23,500 in 2025)
- Can be contributed to alongside a 401(k) or 403(b) with separate contribution limits
Definition
A 457 plan is a tax-deferred retirement plan available to employees of state and local governments (457(b) plans) and certain tax-exempt nonprofit organizations. The 457 plan's most distinctive feature is the absence of a 10% early withdrawal penalty — distributions are taxed as ordinary income at any age after separation from the employer.
The 2025 contribution limit for 457(b) plans is $23,500 ($31,000 for those 50 and older). Critically, 457 plan contribution limits are separate from 401(k) and 403(b) limits, meaning eligible employees can contribute the maximum to both a 457 plan and a 401(k) or 403(b) in the same year.
Additionally, 457 plans offer a special "last three years" catch-up provision. In the three years before the plan's normal retirement age, participants can contribute up to double the standard limit ($47,000 in 2025), though this cannot be combined with the age-50 catch-up in the same year.
How It Works
Employees elect to defer a portion of their compensation into the 457 plan on a pre-tax basis (some plans also offer Roth contributions). The deferred amount grows tax-free until withdrawn. Investment options vary by plan but typically include mutual funds, target-date funds, and stable value funds.
The no-penalty early withdrawal feature makes the 457 plan uniquely valuable for early retirees. A government employee who retires at 52 can access their 457 plan funds immediately without the 10% penalty that would apply to 401(k) or IRA distributions. Ordinary income taxes still apply, but the absence of the penalty makes a meaningful difference.
Governmental 457(b) plans can be rolled over to an IRA or other qualified plan. However, non-governmental 457(b) plans (at tax-exempt nonprofits) are subject to the employer's creditors and cannot be rolled over to an IRA, making them less secure.
Example
A city firefighter earning $80,000 contributes $23,500 to her 457 plan and $23,500 to her 401(k) — a total of $47,000 in tax-deferred retirement savings per year. After 25 years of service, she retires at age 50. She can immediately begin withdrawing from her 457 plan without the 10% early withdrawal penalty that would apply to her 401(k) distributions. She draws $40,000 per year from her 457 plan to bridge the gap until she can access her 401(k) at age 59½, paying only ordinary income taxes on the withdrawals.
Why It Matters
The 457 plan is a powerful and underutilized retirement tool, particularly for government employees planning to retire before age 59½. The combination of no early withdrawal penalty and separate contribution limits from 401(k)/403(b) plans makes the 457 an exceptional vehicle for accelerating retirement savings.
Government employees who have access to both a 457 plan and a 401(k) or 403(b) should seriously consider contributing to both. The ability to defer nearly $50,000 per year across both plans (or more with catch-up contributions) can dramatically accelerate the path to financial independence and early retirement.
Advantages
- No 10% early withdrawal penalty at any age after leaving the employer
- Separate contribution limits from 401(k) and 403(b) plans — double the savings
- Special last-three-years catch-up allows up to double the annual limit
- Ideal for early retirees who need access to funds before age 59½
Limitations
- Only available to government and certain nonprofit employees
- Non-governmental 457 plans are subject to the employer's creditors
- Investment options may be limited compared to IRAs
- Non-governmental plans cannot be rolled over to an IRA
Frequently Asked Questions
Related Terms
Browse more definitions in the financial terms glossary.