How Does a 457b Work?
Jason Stolz CLTC, CRPC
How Does a 457b Work? A 457b plan is a type of deferred compensation retirement account available to employees of state and local governments and certain nonprofit organizations. It allows workers to defer part of their salary on a pre-tax basis, helping reduce taxable income while saving for the future.
Similar to a 401(k) or 403(b), funds in a 457(b) grow tax-deferred until withdrawn. However, 457(b)s have unique rules—especially when it comes to withdrawals and rollovers—that make them particularly appealing for employees planning early retirement or career transitions.
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457(b) Plan Basics
457(b) plans are funded primarily by employee salary deferrals. Contributions are made on a pre-tax basis, and investment earnings grow tax-deferred until distribution. Unlike 401(k) or 403(b) plans, the 457(b) is not subject to early withdrawal penalties before age 59½ if you separate from service.
- Eligibility: Available to government and nonprofit employees.
- Contribution limit (2025): $23,000 per year, plus $7,500 catch-up for age 50+ participants.
- Special catch-up: In the last three years before normal retirement age, you may contribute up to double the annual limit.
- Employer match: Less common, but some public employers contribute to encourage participation.
457(b) vs. 401(k) and 403(b) Comparison
| Feature | 457(b) | 401(k)/403(b) |
|---|---|---|
| Eligibility | Government & Nonprofits | Private & Nonprofit Employers |
| Withdrawal Penalty | No 10% Penalty Before 59½ | 10% Penalty Applies |
| Catch-Up Contributions | Double Limit for Final 3 Years | Standard $7,500 Catch-Up |
| Rollover Options | IRA, 401(k), 403(b), or Annuity | IRA or Annuity |
Withdrawals and Rollovers
Withdrawals from a 457(b) are taxed as ordinary income but not subject to the 10% early distribution penalty if you’ve left your employer. Funds can be rolled into an IRA or annuity for continued tax deferral and flexible income options.
A direct rollover ensures the funds move between custodians without creating a taxable event. Rolling into an annuity can guarantee income for life while keeping your savings protected from market losses.
Estimate Income From Your 457(b) Plan
Use this calculator to see potential lifetime income from your 457(b) balance and compare current fixed annuity rates.
Key Advantages of the 457(b) Plan
- Flexible withdrawals after leaving employment—no early penalty
- High contribution limits and special catch-up provisions
- Tax-deferred growth and deductible contributions
- Rollover compatibility with annuities for guaranteed lifetime income
- Ideal for early retirees or public-sector employees
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FAQs: 457(b) Retirement Plans
Who is eligible for a 457(b) plan?
457(b) plans are designed for employees of state and local governments or certain nonprofit organizations.
What are the 457(b) contribution limits?
For 2025, participants can defer up to $23,000, plus an additional $7,500 if over age 50. Special catch-up rules may allow double contributions.
Can I withdraw before age 59½?
Yes, if you’ve left your employer. 457(b) plans do not have the 10% early withdrawal penalty that applies to 401(k)s or 403(b)s.
Can I roll over a 457(b) into an annuity?
Yes, a direct rollover can move your funds to an IRA or annuity without taxes or penalties.
Are withdrawals from a 457(b) taxed?
Yes. Withdrawals are taxed as ordinary income in the year received, though they retain tax-deferred growth until that point.
