All contributions to 457 plans grow tax-deferred until retirement when they are either rolled over or withdrawn.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.

Key Takeaways

  • A 457 plan is one of several retirement plans that employers offer to their workers, but it is less common and more complex than a 401(k) or 403(b).
  • Most private companies usually offer 401(k) plans and public school systems, and other nonprofits offer 403(b) plans. 
  • You can withdraw your money from 457 before age 59½ without a 10% penalty, unlike a 401(k), but you will owe taxes on any withdrawal.

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. If you qualify, you can contribute to both a 457 plan and a Roth IRA, and by doing so, you may be able to save more money for retirement than if you only investing in one account.

Withdrawals from 457 plans are indeed taxable, but early withdrawals are not penalized.

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.

Note that you can have a 457 plan, Roth IRA, and Roth 457. A Roth 457 allows you to contribute to the plan on an after-tax basis and pay no taxes on qualifying distributions when the money is withdrawn.

457 Plans Are Unique and Complex

As the only non-qualified 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.