what is a 457 plan 
a 457 plan is a tax advantaged retirement savings plan offered to employees of many state and local governments and some nonprofit organizations like the better known 401 k plan in the private sector the 457 plan allows employees to deposit a portion of their pre tax earnings in an account reducing their income taxes for the year while postponing the taxes due until the money is withdrawn after they retire a roth version of the 457 plan which allows after tax contributions may be allowed at the employer s discretion there are two main types of 457 plans investopedia julie bangtypes of 457 plansas noted the 457 plan comes in two flavors the 457 b and the 457 f the 457 b plan is most often offered to civil servants police personnel and other employees of government agencies public services and nonprofit organizations such as hospitals churches and charitable organizations it is similar to a 401 k participants set aside a percentage of their salary into a retirement account the employees choose how their money is invested from a list of options mostly mutual funds and annuities the account grows in value without being taxed over the years when the employee retires taxes will be due on the amount withdrawn 1employees are allowed to contribute up to 100 of their salary provided it does not exceed the dollar limit set for the year 2if the 457 plan does not meet statutory requirements the assets may be subject to different rules 457 b contribution limitsas of 2023 employees can contribute up to 22 500 per year to 457 plans this limit increases to 23 000 for 2024 in some cases workers are allowed to contribute even more for example if an employer permits catch up contributions workers over the age of 50 may pay in an additional 7 500 a year making their maximum contribution limit 30 000 22 500 7 500 in 2023 the catch up contribution remains at 7 500 for tax year 2024 making the maximum contribution limit 30 500 23 000 7 500 also 457 b plans feature a double limit catch up provision this 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 in this case employees who are within three years of retirement age may contribute up to 45 000 in 2023 and up to 46 000 in 2024 32advantages and disadvantages of a 457 b planthe 457 b plan has all of the advantages of a 401 k although there are some differences tax benefitsif a traditional rather than a roth plan is chosen the contributions are deducted from an employee s paycheck on a pre tax basis that amount is subtracted from the employee s gross income effectively lowering the person s taxes paid for that year for example if alex earns 4 000 per month and contributes 700 to a 457 b plan alex s taxable income for the month is 3 300 employees invest their contributions in their choice or choices from a selection of annuities and mutual funds all interest and earnings generated from year to year remain untaxed until the funds are withdrawn 4withdrawals without penaltythere is one big difference between the 457 b and other tax advantaged retirement plans no penalty for early withdrawals in some circumstances if an employee retires early or resigns from the job for any reason the funds can be withdrawn without incurring a 10 penalty from the irs 56 early withdrawals from most retirement plans are subject to the penalty except for certain hardship reasons the penalty was waived for two years during the covid 19 pandemic 7a 457 b account holder can take a penalty free withdrawal without changing jobs like a 401 k account holder the list of acceptable reasons however is limited to unforeseeable emergencies 8exceptions to the rulesearly withdrawals from a 457 b are subject to the 10 penalty if the account holder rolls the funds over from a 457 to any other tax advantaged retirement account such as a 401 k this would happen if for example a government employee quit to take a job in the private sector 9in addition anyone who takes money out of a retirement account early must keep in mind that any income taxes due on that money will be owed in the year that the withdrawal is taken one potential advantage of most tax advantaged retirement savings plans is the employer match an employer may choose to match some portion of an employee s contribution to the plan an employer who matches the first 3 of the employee s contribution for example is presenting the employee with a 3 raise employer match is rareemployers can match their employees contributions to a 457 b but in practice most don t if they do the employer contribution counts toward the maximum contribution limit 2 this is not the case for 401 k plans 10for instance in 2023 if an employer contributes 10 000 to a 457 b plan the employee can add only 12 500 for the year until the 22 500 contribution limit is reached except for those eligible to use the catch up option 11looser rules for early withdrawals without a penalty early distributions allowed for participants who leave a job as with other retirement plans no taxes are due until money is withdrawn employer contributions count toward contribution limit the year they vest employer contributions subject to vesting schedule if the employee quits non vested funds are forfeited limited investment choices compared to private sector plans 457 b vs 403 b the 403 b plan like the 457 b is mostly available to public service employees they are a particularly common benefit offered to public school teachers 12the 403 b has its origins in the 1950s when it exclusively offered an annuity to participants 13 participants still have the option of creating an annuity but they also can choose to invest in mutual funds 4in fact the 403 b has changed over the years until it closely resembles the private sector s 401 k plan although the investment choices offered to participants are relatively limited the annual contribution limits are identical to those of the 457 b and 401 k plans 14if you re a public employee your employer may well offer a 457 b or a 403 b dan stewart cfa revere asset management dallas tx457 plans are taxed as income similar to a 401 k or 403 b when distributions are taken the only difference is there are no withdrawal penalties and that they are the only plans without early withdrawal penalties but you also have the option of rolling the assets in an ira rollover this way you can better control distributions and only take them when needed so if you take the entire amount as a lump sum the entire amount is added to your income and may push you into a higher tax bracket with the rollover route you could take out a little this year and so on as needed thus controlling your taxes better and while it remains inside the ira it continues to grow tax deferred and is protected from creditors 