How does a 457(b) work? A 457(b) is a deferred compensation retirement plan most commonly offered to employees of state and local governments (and, in certain cases, nonprofit organizations). You choose to defer part of your pay into the plan, usually on a pre-tax basis, which can lower your taxable income while you build retirement savings. Your contributions can then grow tax-deferred until you take withdrawals later.

On the surface, a 457(b) can look like a 401(k) or 403(b). The big difference is what happens when you leave your job. Many 457(b) plans allow distributions after separation from service without the typical 10% early-withdrawal penalty that applies to many other workplace plans. That single rule can make a 457(b) especially valuable for employees who retire early, change careers, or transition out of public service before age 59½.

This guide explains how a 457(b) works from end to end: eligibility, contributions, tax treatment, catch-up rules, investment considerations, distribution timing, and rollover options. We’ll also cover the practical retirement question that matters most: how to turn a 457(b) balance into a dependable retirement paycheck—often by coordinating it with other benefits and, when appropriate, comparing annuity-based income strategies.

What a 457(b) Plan Is and Why It’s Different

A 457(b) is a retirement plan created under a section of the tax code that allows certain employers to offer deferred compensation. “Deferred compensation” simply means you postpone receiving part of your income today so you can save it for later. In practical terms, you elect a contribution amount during enrollment (often a percentage of pay or a flat dollar amount per paycheck), and those dollars are deposited into your 457(b) account.

Like other defined contribution plans, your results depend on how much you contribute, how long you contribute, the investment options inside the plan, and your withdrawal strategy once distributions begin. What makes a 457(b) stand out is the combination of (1) high contribution limits comparable to many other workplace plans and (2) distribution rules that can be more flexible after you separate from service.

Many public-sector employees also have access to other retirement benefits such as a pension, a 403(b), a 401(a), or a combination of these. If you have a 401(a) alongside a 457(b), it’s worth understanding how each plan works because they often play different roles in retirement planning. For a plain-English overview of the employer-controlled plan that frequently pairs with public-sector retirement benefits, see How Does a 401(a) Work?

Who Can Use a 457(b): Government Plans vs Nonprofit Plans

Most 457(b) plans are offered by state and local government employers—think municipalities, counties, state agencies, public safety departments, and certain public authorities. Some nonprofit employers can also offer 457(b) plans, but the nonprofit version can operate differently in ways that matter for long-term planning. The best starting point is confirming what type of 457(b) you have, because the “rules that matter most” depend on whether it’s a governmental plan or a non-governmental plan.

A helpful way to think about this is: a governmental 457(b) is typically treated as a mainstream retirement plan with robust rollover flexibility, while certain nonprofit 457(b) plans may have additional constraints. That doesn’t make them “bad,” but it does mean you should understand distribution triggers, rollover options, and any plan-specific limitations before making retirement decisions. If you’re unsure which version you have, your plan summary or benefits department can usually confirm it quickly.

Regardless of plan type, the day-to-day mechanics are similar: you defer income into the account, your money is invested (based on the options your plan offers), and your balance grows over time. The big differences show up later—at separation, at retirement, and when you want to coordinate rollovers with other retirement assets.

How Contributions Work: Limits, Catch-Up Rules, and Timing

A 457(b) is primarily funded by employee deferrals. In many plans, contributions are made on a pre-tax basis, which can reduce your current taxable income. Your balance then grows tax-deferred until you withdraw funds. Some plans may offer Roth contributions depending on plan design, but the most common structure is still pre-tax deferral.

Contribution limits can change over time, but many participants focus on the practical question: “How much can I put away this year?” Your plan will typically publish the current annual limit and any catch-up allowances. In the draft planning context, the commonly referenced annual contribution limit is $23,000 (2025), with an additional catch-up contribution available to participants age 50 or older. The catch-up is valuable if you’re trying to accelerate savings in your final working years, but it becomes even more powerful when combined with the 457(b)’s own special catch-up rule.

The distinctive catch-up rule for many 457(b) plans applies in the last few years before “normal retirement age” as defined by the plan. In those years, eligible participants may be able to contribute up to double the standard limit. This can make the 457(b) an exceptional late-career savings tool, especially for employees who spent earlier years focused on other priorities or who had periods of lower income.

The practical planning takeaway is simple: if you’re within several years of retirement and your plan allows the special catch-up, it may create a window to rapidly increase retirement savings in a way that’s hard to replicate elsewhere. If you’re further from retirement, consistency tends to matter more than perfection—regular contributions over a long period can build meaningful retirement assets even if you never “max out.”

Tax Treatment: What You Get Now vs What You Pay Later

For most participants, the tax advantage of a 457(b) is immediate: pre-tax contributions reduce taxable income today. That can increase take-home efficiency because you’re redirecting dollars that would otherwise be taxed into a retirement account designed for long-term compounding. Over time, growth inside the plan is not taxed annually, which can help your balance build faster than an account where gains are taxed each year.

The trade-off is that withdrawals are generally taxed as ordinary income when you take them. That’s why distribution planning matters. Two retirees with the same 457(b) balance can experience very different retirement outcomes depending on how quickly they draw down the account, what other income they have (pension, Social Security, part-time work), and how their withdrawals interact with their tax bracket.

Because taxes are often the “silent variable” in retirement, many retirees use a simple framework: they aim to build a stable income floor first (cover essentials), then keep the rest of their plan flexible. This helps reduce the pressure to take large withdrawals in down markets or to accidentally spike taxable income in a single year.

Investments Inside a 457(b): Growth, Risk, and Fee Awareness

A 457(b) is a plan wrapper. The investments inside the wrapper determine how your balance behaves. Many plans offer a menu of mutual funds, index options, target-date funds, and stable-value or fixed options. Your plan’s lineup may be broad or limited depending on the employer and the plan administrator.

In the accumulation phase, your investment choices are usually the main driver of long-term results. In the distribution phase, investment choices still matter, but withdrawal timing and risk management can matter just as much. That’s where sequence-of-returns risk shows up: if you withdraw from a volatile portfolio during a large downturn early in retirement, the portfolio may have less capacity to recover.

Fees deserve special attention. Even small differences in ongoing expenses can compound over decades. You do not need to chase “the cheapest” at all costs, but you do want to understand what you are paying and why. If a portion of your retirement plan is intended to fund stable income, many retirees prefer to use stable structures for that portion rather than leaving everything exposed to market volatility and hoping withdrawals work out.

Withdrawals: The Rule That Makes 457(b) Plans So Useful for Early Retirees

The most talked-about 457(b) feature is the distribution rule after separation from service. In many cases, once you leave your employer, you can take distributions from a 457(b) without the standard 10% early-withdrawal penalty that often applies to other workplace retirement plans before age 59½. This can be extremely helpful for employees who retire early, shift careers, or need bridging income between separation and the start of other income sources.

It’s important to separate two concepts: penalty versus tax. Avoiding an early-withdrawal penalty does not mean withdrawals are tax-free. Most 457(b) withdrawals are still taxed as ordinary income. The advantage is that the plan may allow more flexible access timing without adding a separate penalty layer, which can make withdrawal planning easier and more efficient.

This flexibility is also why some retirees intentionally leave part of their “bridge years” income in the 457(b). Instead of forcing all early retirement withdrawals out of other accounts that may penalize early distributions, they use the 457(b) as a planned income source. Coordinating this with pensions, Social Security timing, and any other accounts can make retirement income smoother and more predictable.

Rollovers: How to Move a 457(b) Without Creating a Tax Problem

When you retire or change employers, you may want to consolidate accounts, change investment structure, or reposition part of the balance toward retirement income. That’s where rollovers come in. A rollover can allow you to move the balance to another qualifying retirement vehicle while preserving the tax-deferred status. The cleanest execution method is typically a direct rollover, meaning the money moves custodian-to-custodian and is not paid to you personally.

If you want the rollover mechanics explained clearly—and why the “direct” method is usually preferred—start here: What Is a Direct Rollover? The core idea is to reduce withholding issues and deadline risk, especially during a stressful life transition like retirement.

Many 457(b) holders ask a practical follow-up question: “How does a 457(b) rollover to an annuity work?” A rollover to an annuity can be used to preserve tax deferral while shifting some or all of the account into a structure designed for retirement income. If you want a step-by-step overview of that process, see How to Transfer a 457(b) to an Annuity.

Rollovers are not just paperwork. The rollover decision changes how your retirement plan behaves. Some retirees value maximum market upside, while others value principal protection and predictable income. Many choose a blended approach. The key is aligning the rollover destination with what you actually want your retirement paycheck to do.

Turning a 457(b) Balance Into Retirement Income: How Annuities Can Fit

A 457(b) is excellent for building savings, but it does not automatically create lifetime income. In retirement, the question shifts from accumulation to income design: how do you turn a balance into a paycheck you can live on, and how do you reduce the risk of running out? Some retirees rely entirely on systematic withdrawals from investments. Others prefer to build an “income floor” using guaranteed or contract-defined income sources so that essential expenses are covered regardless of market conditions.

This is where annuities are often evaluated. An annuity can be used to convert a portion of retirement assets into structured income, with designs ranging from principal-protected accumulation options to income-focused contracts. For people who want to start by comparing what’s available today, a good first step is reviewing rates and structures in one place: Current Fixed Annuity Rates.

Another common approach is to compare lifetime income illustrations and quote structures to see what different options might generate as monthly income. If you want a direct look at how lifetime income options compare, see Lifetime Income Annuity Quotes.

Some retirees want principal protection and are also interested in “defined outcome” style planning for income. Others want to prioritize guaranteed income above all else. If that’s your goal, this resource is a helpful starting point for understanding what people mean by “best” in a guaranteed income context (which often depends on age, income start date, joint options, and rider structure): Best Annuity for Guaranteed Income in Retirement.

The biggest planning mistake is assuming every dollar must behave the same way. Many durable retirement plans split assets into roles: a stable income role (to cover essentials), a flexible role (for discretionary spending and inflation), and a reserve role (for unexpected costs). A 457(b) rollover decision can help you assign those roles intentionally rather than leaving retirement income to chance.

Estimate Income From Your 457(b) Plan

If retirement is within sight, one of the most valuable steps is translating a 457(b) balance into an income estimate. Use the calculator below to model income scenarios, then compare stable income structures using the rate and quote pages above.

Real-World 457(b) Planning Scenarios

Scenario 1: Early retirement bridge. Many public employees retire before age 59½, especially if they have pension eligibility or a planned career change. A key advantage of the 457(b) is that it can often be used as a bridge income source after separation. That flexibility can reduce pressure to draw from other accounts that may penalize early distributions, and it can also help delay other income sources until they become more favorable.

Scenario 2: Coordinating multiple plans. It’s common for public-sector employees to have more than one plan. Some have a 401(a) plus a 457(b); others have a 403(b) plus a 457(b). The best planning outcome usually comes from giving each account a job. One account might be a “stable income” bucket, while another remains growth-oriented. The goal is not to pick a single perfect product, but to design a retirement paycheck that stays durable across different market and life outcomes.

Scenario 3: Simplifying after retirement. Retirement often brings a desire for simplicity. Multiple accounts, multiple vendors, and multiple investment menus can make retirement income harder to manage. A rollover strategy—executed correctly—can streamline the plan and align it with retirement income goals. The focus becomes clarity: how much income you can count on, how much flexibility you retain, and how you protect against the risk of depleting assets too quickly.

Key Takeaways: How a 457(b) Works from Saving to Retirement Income

A 457(b) works by letting eligible employees defer compensation into a tax-advantaged retirement plan, usually on a pre-tax basis. Your balance grows tax-deferred until you withdraw it. The plan’s unique value often shows up at separation from service, where many 457(b) plans allow access without the standard early-withdrawal penalty that applies to many other plans.

Contribution limits are typically high, and the special catch-up provision can create a powerful late-career savings window. Investment choices and fees still matter, but distribution strategy becomes crucial in retirement. If your goal is dependable income, many retirees compare rollover paths and evaluate whether converting a portion of the balance into structured income improves long-term outcomes.

The cleanest way to reposition a 457(b) is typically through a direct rollover, then aligning the destination with your retirement goals. Whether you prioritize flexibility, protection, guaranteed income, or a blended approach, the best outcome comes from intentional design rather than defaulting to “whatever the plan offers” after you retire.