Tessa Quinn
A 457 plan is a tax-advantaged retirement plan offered by certain employers. There are two types of 457 plans: 457(b) and 457(f). The 457(b) plan is a version of the 401(k) plan designed for public and nonprofit workers. It is available to employees of government agencies, public services, and nonprofit organizations, including hospitals. The 457(f) plan, also known as a Supplemental Executive Retirement Plan (SERP), is a retirement savings plan for only the highest-paid executives in the tax-exempt sector, who are mostly employed in hospitals, universities, and credit unions. As such, most hospitals do offer 457 plans to their employees.
| Characteristics | Values |
|---|---|
| Type of plan | Tax-advantaged, deferred compensation retirement plan |
| Who is it for? | Employees of government agencies, public services, and nonprofit organizations such as hospitals, churches, and charitable organizations. |
| Taxation | Pre-tax contributions, tax-deferred |
| Contribution limit | Up to $19,000 annually in 2019; $24,000 annually if over 50; $23,000 in 2024; $22,500 in 2023; $20,500 in 2022; $19,500 in 2021 and 2020 |
| Early withdrawal | No 10% penalty for early withdrawal |
| Distribution options | Some plans require a lump sum on separation; others allow deferring distribution until retirement age |
| Rollovers | A private 457(b) can only be rolled into another private 457(b) |
| Pros | Access to money before age 59.5; lowers taxable income; flexible distribution options |
| Cons | Money deposited technically belongs to the employer and could be used to pay off creditors if the hospital goes under |
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What You'll Learn
Governmental vs. non-governmental 457(b) plans
A 457(b) plan is a tax-advantaged employer-sponsored retirement plan offered to some government employees and employees of certain tax-exempt organisations. There are two types of 457(b) plans: governmental and non-governmental.
Governmental 457(b) plans are sponsored by a government entity. Like 401(k)s, contributions are held in a trust and can't be claimed by the employer's creditors. Money saved in a governmental 457(b) can be rolled over into other retirement accounts such as IRAs and 401(k)s. Employees may be automatically enrolled in a governmental 457(b) plan.
Non-governmental 457(b) plans, also known as tax-exempt 457(b) plans, are backed by the offering company, which could be a college or other non-profit organisations. In a non-governmental 457(b), the employee must tell their employer the percentage of their income they wish to contribute, but the account is owned by the employer, not the employee. This means that if the employer runs into financial trouble, the employee's funds could be at risk. Funds from a non-governmental 457(b) cannot be rolled over into another retirement account, and the employee may not have control over how the funds are invested. Employees must elect to participate in a non-governmental 457(b) plan.
There are significant tax advantages to 457(b) plans. Contributions are tax-deferred, reducing taxable income. Earnings made on contributions through investments such as mutual funds and annuities also grow tax-deferred. Taxes are only paid on withdrawals in retirement. There is no penalty for early withdrawal, and no 10% penalty for withdrawing before the age of 59 1/2, making it a good option for those planning early retirement.
In 2025, employees can contribute up to $23,500 to a 457(b) plan, or up to their includible compensation if this is less than the annual limit. This is an increase from $23,000 in 2024, $22,500 in 2023, $20,500 in 2022, and $19,000 in 2019. Those in governmental plans who are 50 or older may be eligible for a catch-up contribution of up to $7,500, increasing the limit to $31,000. Those in non-governmental plans do not have this option.
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Taxation and distribution rules
The tax-deferred status of 457(b) plans offers flexibility, allowing access to funds before the age of 59.5 without an early withdrawal penalty, provided the individual is no longer employed by the plan sponsor. However, withdrawals are subject to income tax and wage tax, impacting the year's tax return. Default withdrawals are typically a lump sum, potentially increasing tax liability significantly. Seeking financial advice before withdrawing is recommended to avoid a substantial tax bill.
For governmental 457(b) plans, designated Roth contributions and in-plan rollovers to designated Roth accounts are permitted. Nonprofit Code §457(b) plans allow for unforeseeable emergency distributions, such as severe financial hardship due to accidents, illness, property loss, or funeral expenses. Additionally, participants in Nonprofit Code §457(b) plans may be eligible for "special" catch-up contributions in the three years before reaching retirement age.
Distribution options vary, with some plans requiring a lump sum withdrawal upon separation from employment. Deferring distribution until retirement age is often preferred to maintain control over taxable income. In the case of private 457(b) plans, rollovers are limited to other private 457(b) plans, and the new plan must accept rollovers. It is important to note that contributions exceeding the annual limits must be distributed to the participant by April 15 of the following taxable year.
The tax advantages of 457(b) plans are significant, allowing employees to defer income taxation on retirement savings. The contribution limits for 457(b) plans are set by the IRC 402(g) limit, which was $23,000 in 2024 and $19,000 in 2019. These contributions are made through salary reductions, and any excess contributions not removed by the tax return deadline may be subject to double taxation.
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Pros and cons of 457 plans
B) plans are tax-deferred retirement savings plans. They are voluntary plans designed for public service employees to complement their existing retirement or pension plans. They are also offered by tax-exempt employers, such as non-profit hospital systems.
Pros of 457(b) plans
The key benefit of 457(b) plans is that they are tax-deferred. Contributions are made from pre-tax dollars, reducing the employee's taxable income for the year. Earnings on these contributions also grow tax-deferred, and taxes are only paid upon withdrawal, typically during retirement.
Another advantage is that there is no penalty for early withdrawal. Unlike other retirement plans, such as 401(k) or 403(b), employees can withdraw money from their 457(b) before the age of 59 1/2 without a 10% penalty. This makes it a good option for those planning early retirement.
Employees can also maintain control over their investments and have access to financial consultants and advisors.
Cons of 457(b) plans
One potential disadvantage of 457(b) plans is that the money deposited technically belongs to the employer and could be used to pay off their creditors. This is only an issue if the employer goes bankrupt.
Additionally, there may be limited distribution options when leaving a job. Some plans require a lump sum distribution upon separation, while others allow for deferring distribution until retirement age.
For non-governmental 457(b) plans, there is also the limitation that they can only be rolled over into another non-governmental 457(b), and the new plan would have to accept rollovers.
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Eligibility and contribution limits
A 457(b) plan is a tax-deferred retirement savings plan. It is available to employees of certain state and local governments and non-governmental entities that are tax-exempt under IRC Section 501. The key benefit of the 457(b) plan is that contributions are made with pre-tax dollars, reducing taxable income and allowing for the payment of less federal income tax. Earnings on contributions through investments such as mutual funds and annuities also grow tax-deferred. Taxes are paid only when withdrawals are made in retirement.
There are two types of 457(b) plans: governmental (or public) and non-governmental (or private). Governmental 457(b) plans may be amended to allow designated Roth contributions and in-plan rollovers to designated Roth accounts. Private 457(b) plans can only be rolled into another private 457(b) plan, and the new plan must accept rollovers.
The contribution limit for 457(b) plans is $23,500 in 2025. Employees aged 50 or older may contribute an additional $7,500, for a total of $31,000. Employees taking advantage of the special pre-retirement catch-up may be eligible to contribute up to double the normal limit, for a total of $47,000. In 2019, the contribution limit was $19,000, and in 2020, it was $19,500.
Employees with a 457(b) plan can choose to invest in a variety of different funds, depending on the specific plan offered by their employer. They can invest their deferred compensation in mutual funds or annuities.
It is important to note that the money deposited in a 457(b) plan technically belongs to the employer and can be used to pay off the employer's creditors. This is only an issue if the hospital goes out of business. Therefore, it is advisable to check the hospital's credit rating before investing in a 457(b) plan.
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Early withdrawals
A 457(b) plan is a tax-deferred retirement savings plan that allows employees to defer part of their wages and save them for retirement. The key benefit of the 457(b) plan is that it offers penalty-free withdrawals after leaving a job, setting it apart from other retirement plans such as 401(k) and 403(b) plans. This means that employees can access their funds without the usual 10% penalty that applies to early withdrawals from other types of retirement accounts.
While withdrawals from a 457(b) plan are not subject to the 10% early withdrawal penalty, individuals will still need to pay regular income taxes on that money. This is because contributions to a 457(b) plan are made with pre-tax dollars, reducing an employee's taxable income for the year. The earnings made on these contributions also grow tax-deferred, and taxes are only paid when withdrawals are made in retirement.
In addition to the tax benefits, a 457(b) plan offers flexibility in terms of withdrawal options. Employees can withdraw money from their 457(b) plan before reaching the age of 59 1/2, which is the standard retirement age for other retirement plans. This makes it a great option for individuals who are planning for early retirement or who may retire before reaching the age of 59 1/2.
It is important to note that the specific withdrawal options may vary depending on the type of 457(b) plan offered by the employer. Some plans may require employees to take out a lump sum upon separation from their job, while others may allow for deferred distribution until retirement age. Additionally, there are two types of 457(b) plans: governmental (or public) and non-governmental (or private). The type of plan offered will determine the distribution options and tax implications.
Overall, the 457(b) plan offers a unique retirement savings option for public sector employees, providing tax-deferred growth, flexible withdrawal options, and the absence of early withdrawal penalties. These features make it a valuable tool for individuals looking to maximize their savings and access their funds earlier than traditional retirement plans.
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Frequently asked questions
A 457(b) plan is a retirement plan for employees of government agencies, public services, and nonprofit organizations such as hospitals, churches, and charitable organizations. It is similar to a 401(k) plan, but with some key differences.
The key benefit of a 457(b) plan is that it is tax-deferred. Contributions are made with pre-tax dollars, reducing taxable income. Earnings made on contributions also grow tax-deferred, and taxes are only paid when withdrawals are made during retirement. Additionally, there is no penalty for early withdrawal, providing flexibility for those planning early retirement.
457(b) plans are typically offered by governmental or non-governmental entities. Governmental plans are similar to 401(k) plans and may be amended to include a Roth option. Non-governmental plans, offered by tax-exempt employers, function as tax-advantaged salary deferral plans and cannot offer a Roth option. Hospitals can offer either type of plan, so it is important to understand the specifics of your hospital's plan.
