Saving for retirement means choosing the right plan, and a 457(b) is one option worth considering. Designed for employees of certain state and local governments, this plan offers valuable tax advantages to help build long-term savings. In this blog, we'll break down what a 457(b) plan is, how it works, and the benefits it provides.

What Is a 457(b) Plan?

This retirement savings plan is offered by state and local government agencies, and some nonprofit employers. It allows employees to put away money for retirement on a pre-tax basis.

That means taxes on this income are deferred until you take the money out during retirement.

A 457(b) plan has rules about how much you can contribute each year. In 2025, you can put in $23,500 if you're under age 50. If you're 50 or older, there's a catch-up limit that lets you contribute even more—up to $31,000. ​

These plans sometimes offer Roth options too, where contributions are made after-tax but withdrawals are tax-free.

Think of it as setting aside part of your paycheck before Uncle Sam takes his share—all to build up your nest egg for later.

How Does a 457(b) Plan Work?

A 457(b) plan enables employees to prepare for retirement by allocating a portion of their salary into the plan before tax deductions.

This arrangement reduces your current tax liabilities due to a decrease in taxable income. If permitted by the plan, your employer might also contribute; however, the combined total of employer and employee contributions cannot exceed the annual limit set by the IRS.

The growth of your funds in a 457(b) plan is tax-deferred. You are exempt from paying taxes on earnings until you withdraw money, typically during retirement. Annual contribution limits apply.

For instance, in 2025, the cap is set at $23,500 for most participants. If you're over 50 or nearing retirement with insufficient savings, there may be an option to contribute more through catch-up contributions.

Types of 457(b) Plans

There are two main types of 457(b) plans: governmental and non-governmental. Each offers unique benefits and rules for participants.

Governmental 457(b) Plans

These retirement plans serve state and local government employees. They allow you to save money for retirement through pre-tax contributions, with taxes deferred until withdrawal.

With a governmental plan, your employer may also contribute.

These plans have higher catch-up contribution limits than many other options. They offer flexibility in investment choices, too. Participants can invest in mutual funds or stocks, depending on the plan's options.

If your job goes away or if you face an emergency, you can take an early withdrawal without penalties under certain rules—this is different from other retirement accounts.

A Governmental 457(b) Plan helps employees save while keeping tax benefits.

Let's explore non-governmental 457(b) plans next.

Non-Governmental 457(b) Plans

These plans are often set up by non-profit organizations and private employers. They let employees save for retirement through a deferred compensation plan.

Unlike governmental 457(b) plans, non-governmental 457(b) plans do not permit Roth (after-tax) contributions. Therefore, all contributions are made on a pre-tax basis, and withdrawals are taxed as ordinary income. ​

Employees can invest in various options offered by the plan provider too.

Non-governmental 457(b) Plans also have specific rules about withdrawals. Unlike other plans, participants can access their money without penalty before retirement age if they leave their job or face an unforeseen emergency.

This flexibility makes them a useful tool for additional savings.

Contribution Limits and Catch-Up Provisions

457(b) plans have specific contribution limits. These limits can change each year.

• For 2024, the maximum contribution limit is $23,000. In 2025, it will be $23,500.
• Employees over age 50 can make catch-up contributions. This adds an extra $7,500 in 2024 and 2025 to their contributions.
• Special catch-up provisions may apply for employees with certain years of service. This allows them to contribute more than the standard limit.
• Contributions can be made on a pre-tax or after-tax (Roth) basis. Pre-tax contributions reduce your taxable income now.
• The Internal Revenue Service updates these limits annually. It's vital to check each year for any changes.
• If your employer offers a non-governmental plan, different rules may apply. These rules could impact contribution amounts and eligibility for catch-ups.
• You may also roll over funds from other retirement accounts like IRAs or 401(k)s into your 457(b) plan. This can help you maximize your retirement savings.

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Understanding these limits helps you plan better for retirement income while keeping tax situations in mind.

457(b) Plan Withdrawal Rules

Withdrawing from a 457(b) plan follows straightforward guidelines. Understanding these rules helps you plan for retirement better.

1. Withdrawals are usually allowed after reaching a certain age, which depends on your birth year. As required minimum distributions (RMDs) must begin by age 73 for those born between 1951 and 1959, and by age 75 for those born in 1960 or later.
2. A participant may withdraw funds early if there is an unforeseeable emergency. This includes events like medical expenses, natural disasters, severe financial hardship due to illness or accident of the participant or beneficiary, loss of property due to casualty, and other similar extraordinary and unforeseeable circumstances beyond the participant's control.
3. Plan rules often allow for lump sum distributions. You can take all your money at once or in smaller amounts.
4. Employees can also make withdrawals when they leave their job, whether through retirement or another reason.
5. All withdrawals from a 457(b) plan are subject to federal income tax, regardless of the type of contributions made.
6. For Roth 457(b) withdrawals to be tax-free, the account must have been held for at least five years. The distribution must occur after the account holder is at least 59½ years old, has a qualifying disability, or upon the account holder's death. Separation from service alone does not qualify for tax-free withdrawals.
7. There are no penalties for early withdrawals from a 457(b) plan after separating from your employer, unlike other retirement plans.
8. If the employer goes bankrupt, the funds held in a trust remain protected from creditors.
9. Catch-up contributions are available if you're nearing retirement age and want to save more before retiring. For 2025, employees aged 60 to 63 can make additional catch-up contributions of up to $11,250.
10. Survivor benefits may apply, allowing beneficiaries to access funds if something happens to the account holder.

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This gives a clear look into withdrawal rules for a 457(b) plan and helps with future planning too!

Benefits of a 457(b) Plan

A 457(b) plan offers many benefits. One major perk is tax advantages. Contributions can be pre-tax or after-tax, allowing employees to reduce their taxable income now or later.

The annual limit for contributions is $23,500 in 2025.

Another key benefit is flexibility when withdrawing funds. Unlike some retirement accounts, employees can withdraw money without penalties if they leave their job or face unforeseen emergencies.

This makes a 457(b) plan an appealing option for those seeking a supplemental retirement program. With various investment options available, individuals can tailor their strategy to fit personal needs and goals.

Considerations Before Investing in a 457(b) Plan

Before investing in a 457(b) plan, consider your financial goals. These plans offer tax-deferred growth, meaning you won't pay taxes on contributions until withdrawal. You can make pre-tax or after-tax (Roth) contributions.

Think about your retirement timeline. The normal retirement age affects when you can access funds without penalties. Also, be aware of withdrawal rules for unforeseeable emergencies or other situations.

Employer contributions may vary based on the type of plan. Knowing these details helps you decide if a 457(b) fits into your retirement strategy.

How to Maximize Your 457(b) Plan Benefits

Maximizing your 457(b) plan benefits can help you save more for retirement. Follow these tips to get the most out of your plan.

1. Contribute the maximum amount allowed. In 2025, you can contribute up to $23,500. If you're age 50 or older, you may add another $7,500 in catch-up contributions.
2. Choose between pre-tax and Roth contributions. Pre-tax allows you to lower your taxable income now. Roth contributions let you withdraw tax-free during retirement.
3. Set up automatic contributions through payroll deductions. This makes saving easier and keeps you consistent.
4. Review your investment choices regularly. Make sure they align with your risk tolerance and goals.
5. Take advantage of any available employer matches, if applicable. This is free money that boosts your savings.
6. Consider making additional deferrals if you've worked for previous employers with a 457(b) plan. You might be able to roll over funds into your current plan.
7. Stay informed about any changes in contribution limits each year, like the increase planned for future years.
8. Factor in survivor benefits when choosing investments and beneficiaries for added security.
9. Avoid withdrawing funds early unless absolutely necessary; though not subject to early withdrawal penalties, such distributions are still subject to ordinary income taxes and could affect your long-term savings.
10. Consult with a retirement plan provider or financial advisor to make smart decisions about your investments and withdrawals to maximize growth over time.

Work With a Financial Advisor to Maximize Your 457(b) Plan

A 457(b) plan can be a powerful retirement savings tool, but understanding contribution limits, withdrawal rules, and tax advantages is essential to making the most of it.

Whether you're a government employee or a nonprofit worker, a Farther financial advisor can help you optimize your contributions, coordinate your 457(b) with other retirement accounts, and create a tax-efficient withdrawal strategy.

Make the most of your retirement savings. Talk to an advisor today to build a plan tailored to your financial goals.

Conclusion

A 457(b) plan is a valuable tool for retirement savings, offering pre-tax and after-tax contribution options that allow your money to grow tax-deferred. It comes with specific contribution limits, withdrawal rules, and key benefits for government and non-profit employees.

Incorporating a 457(b) into your financial strategy can strengthen your long- term security. Taking action now ensures you're making the most of your retirement savings and setting yourself up for a stable future.

FAQs

1. What is a 457(b) plan and how does it work?

A 457(b) plan, also known as a deferred compensation plan, allows employees to make pre-tax contributions from each pay period towards their retirement savings. The money grows tax-deferred until withdrawal.

2. Can you roll over a 457(b) into another retirement account like Roth IRA?

Yes, rollover is possible with a 457(b). You may be able to transfer your funds into another retirement account such as the Roth IRA.

3. How much can I contribute to my 457(b) plan in the coming years?

For calendar year 2025, employees can make contributions up to $23,500 per year. Catch-up contributions for those reaching a certain age or prior years are also allowed under this plan.

4. Are there any additional taxes on after-tax contributions in a 457(b) Plan?

No, one key difference of the 457(b) plans compared to others is that after-tax contributions do not incur an additional tax penalty upon withdrawal.

5. Can I make both pre-tax and after-tax contributions to my 457(b)?

Yes! A unique feature of the 457(b) deferred compensation plans allow employees options for both pre- and post-tax contribution methods within the same calendar year.

6. Is there a minimum amount required for employee's contribution in each pay period?

The specifics of minimum amounts vary by employer but generally speaking; no - there isn't typically set requirement for minimum amount contributed each pay period under these types of plans.

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