What Is a 457(b) Retirement Plan?
A 457(b) plan is an employer-sponsored retirement plan that puts off paying taxes on the money you contribute until you withdraw money at retirement. You can contribute up to $19,500 to your 457(b) plan in 2021 — and an extra $6,500 in “catch-up” contributions if you are 50 or older.
- A 457(b) plan is similar to a 401(k) retirement account. However, 457(b) plans are only offered by state and local government agencies and certain nonprofit organizations.
- There are limits set by the Internal Revenue Service (IRS) defining how much you can contribute to a 457(b) retirement plan each year.
- 457(b) plans offer greater flexibility in withdrawing money when compared to 401(k) plans. For example, 457(b) rules allow you to withdraw your money early for specific scenarios like covering the funeral expenses of a spouse or dependent, paying for illness or accident bills and accessing money to stop imminent foreclosure, to name a few.
What Is a 457(b)?
A 457(b) retirement plan is similar to a 401(k) or 403(b) plan. It allows you to contribute part of your salary toward a retirement investment plan.
Your contributions to the retirement account are taken directly out of your paycheck. You don’t pay income taxes on the money you contribute until you withdraw money from your 457(b). With a few exceptions, you may face additional penalties if you take money out before six months after your 59th birthday.
Employers who offer 457(b) plans include state and local government agencies and certain nonprofit organizations.
How Does a 457(b) Plan Work?
A 457(b) plan is similar to a 401(k) plan or 403(b) plan. Money is taken directly from each paycheck and invested in your plan. You usually don’t pay income taxes on the money you contribute to a 457(b) plan until you withdraw it.
- 401(k) Plans
- You are most likely to have access to a 401(k) plan if you work for a for-profit organization.
- 403(b) Plans
- A 403(b) plan is an option for public school and university employees and people who work for certain nonprofit organizations. It may be offered along with a 457(b) plan.
- 457(b) Plans
- A 457(b) plan is most often provided to employees of state and local governments. Employers may also offer a 403(b) plan.
You are allowed to invest up to 100 percent of your salary into your 457(b) plan, so long as it does not exceed a set dollar limit. The limit, which may change from year-to-year, is set by the Internal Revenue Service. Depending on your plan, your employer may match all or a portion of your contributions.
The money you and your employer contribute to your 457(b) fund can usually be invested in either mutual funds or annuities. Your plan may offer an array of mutual funds for you to choose from. You are not taxed on interest and dividends on these investments until you withdraw the money.
457(b) vs. 457(f) Plans
There is also a related, 457(f) retirement plan for heads of nonprofit organizations that differs from a 457(b) plan.
A 457(f) plan is sometimes called “the golden handcuffs” because people can’t leave their job without having to give up all the money they’ve invested in the plan.
It’s a frequent recruitment tool for top level executives in the private sector and sometimes used to recruit top executives at nonprofit organizations as well.
The benefits you pay into this plan are held by the company or organization. They are only deposited when you fulfill a certain period of service or accomplish a preset goal for the organization.
457(b) Plan Contribution Limits and Early Withdrawal Penalties
You are limited as to how much you can contribute to a 457(b) retirement plan each year. In 2021, that is either $19,500 or 100 percent of your salary, whichever is less.
If your plan allows it, you may be able to make additional “catch-up” contributions as you near retirement age, significantly raising your contribution limit.
|Situation||Additional “Catch-up” Amount||Total Contribution Limit|
|Up to age 50||None||$19,500|
|50 and older||$6,500||$26,000|
|Within three years of the retirement age set in your plan||$13,000||$39,000|
Early Withdrawal Penalties and Exceptions
A 457(b) plan allows greater flexibility in withdrawing money than 401(k) plans. For instance, you can avoid the 10 percent penalty on early withdrawals if you do so after you’ve left your employer.
But you may still incur the penalty if you are still working for your employer and wish to withdraw your money for some foreseeable expenses, such as paying off credit card debt.
The rules governing 457(b) plans do allow you to withdraw money for certain unforeseeable emergencies.
- Funeral expenses for your spouse or dependents
- Illness or accident involving you, your beneficiary or your beneficiary’s spouse or dependents
- Imminent foreclosure or eviction from your primary residence
- Property loss caused by natural disaster not covered by your or your beneficiary’s homeowner’s insurance
- Unforeseen medical and prescription expenses
- Other major unforeseeable hardships resulting from events beyond your control
Even in these circumstances, you may have to prove that the unforeseeable emergency expense is not covered by your insurance, selling other assets or by using money you’d otherwise be contributing to the 457(b) plan.
Pros and Cons of 457(b) Plans
The biggest advantage of a 457(b) plan is that you can save for retirement while getting a tax break. But there are also limitations to 457(b) plans that you should be aware of.
|If you are within three years of the plan’s retirement age, you can double your “catch-up” contributions (for total contributions of $39,000 per year in 2021).||Few state and local governments – the main providers of 457(b) plans – provide matching contributions.|
|If you leave your job, you can rollover your 457(b) account into either an IRA or a 401(k) plan.||If your employer matches your contribution, that money counts toward the typical total contribution limit of $19,500 for 2021.|
|Taxes on your contributions, interest and dividends are deferred until you withdraw money.||The maximum annual limit for contributions is $39,000 (including all catch-up contributions); far below the $63,000 limit for total 401(k) contributions.|
|Unlike 401(k) and 403(b) plans, if you leave your employer, you can make early withdrawals without paying a 10 percent penalty.||If you have a 457(k) plan, and leave your job before two years is up, you forfeit all the money in the plan.|
A government 457(b) account can also be amended to allow designated Roth contributions. In this form, you pay income taxes on the contributions you make into your plan. But you pay no taxes when you retire and start withdrawing money from the 457(b) plan.
5 Cited Research Articles
- U.S. Internal Revenue Service. (2020, April 16). Unforeseeable Emergency Distributions from 457(b) Plans. Retrieved from https://www.irs.gov/retirement-plans/employee-plans-news-december-17-2010-unforseeable-emergency-distributions-from-457b-plans
- U.S. Internal Revenue Service. (2019, December 4). IRC 457(b) Deferred Compensation Plans. Retrieved from https://www.irs.gov/retirement-plans/irc-457b-deferred-compensation-plans
- U.S. Internal Revenue Service. (2019, November 12). Retirement Topics - 457(b) Contribution Limits. Retrieved from https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-457b-contribution-limits
- Moore, S. (2019, February 16). What Makes a 457(b) Plan Different. Retrieved from https://www.forbes.com/sites/simonmoore/2019/02/16/what-makes-a-457b-plan-different/#37429f3d5ad6
- U.S. Securities and Exchange Commission. (n.d.). 403(b) and 457(b) Plans. Retrieved from https://www.investor.gov/additional-resources/retirement-toolkit/employer-sponsored-plans/403b-and-457b-plans