All contributions to 457 plans grow tax-deferred until retirement, when they are either rolled over or withdrawn. All withdrawals are taxable, regardless of the participant’s age. Similar to 401(k)s and 403(b)s, all contributions into 457 plans grow tax-free, but early withdrawals are not penalized.
Withdrawals from 457 plans are indeed taxable, but early withdrawals are not penalized.
Differences Between 457 Plans and 401(k) and 403(b) Plans
Notably, 457 plans are not classified as qualified plans, and they are not bound by the same rollover and distribution rules as 401(k) and 403(b) plans. Originally, 457 plans were only available to state and local government employees, entities, and 501(c)3 organizations. Looser restrictions now allow more employers to offer 457 plans in addition to other retirement plans.
Unlike 403(b) and 401(k) accounts, participants can take regular withdrawals from 457 plans as soon as they retire, regardless of whether they have reached age 59½. These distributions are taxed as regular income, but the 10% early withdrawal penalty is never applied. Rather than withdrawing funds, participants may generally roll over their 457 plans into qualified retirement plans, such as an IRA.
457 Plans Are Unique and Complex
As the only nonqualified group plans available in the United States, 457 plans are unique and complex, offering several advantages over more widely used deferred-compensation plans. While more employers are offering 457 plans every year, they are not common. There are many different types of 457 plans, all with different characteristics; they are categorized as governmental or non-governmental, and eligible or ineligible. Eligible plans are categorized as 457(b); ineligible plans are categorized as 457(f), and they lack many of the benefits of eligible plans.