457(b) Retirement Plan

A 457(b) plan is a defined contribution, a tax-deferred retirement savings plan that is offered by state & local government employers. This plan is available only to public sector employees and certain types of tax-exempt organizations. 

It allows the employee to contribute a certain percentage of their income on a pre-tax basis, which means they don’t have to pay any taxes on it until they withdraw the money.

Since contributions to a 457(b) plan are pre-tax, this means that you do not have to pay income tax on the money that you contribute. 

The earnings on your contributions grow tax-deferred until you withdraw them in retirement.

How 457(b) Plan Works

When you enroll in a 457(b) plan, your employer will automatically contribute a percentage of your salary to the plan. 

You can also choose to contribute yourself, and you have the option to contribute as much or as little as you want. 

Who Is Eligible to Enroll in a 457(b) Plan?

All US citizens are eligible to enroll in a 457(b) plan if they are employed by the state & local government. If you have multiple jobs, you are only allowed to have one 457(b) account. 

The contributions that your employer makes for you do not depend on the amount of money that you deposit into your account each month. 

Examples of the employees eligible for this plan are:

  • Police officers
  • Firefighters
  • Teachers
  • Nurses 
  • Paramedics
  • Municipal employees, like sanitation workers
  • Government officers

Who Can Contribute to Your 457(b) Account?

Only you and your employer can contribute money into your 457(b) account. 

However, you can give access to your account to someone else while you are still working. 

For example, say that you start a 457(b) plan when you are 25 years old and then get married when you are 40. 

You would not have to choose who will own the account until you retire. 

This means that you can give your spouse access to your 457(b) plan without having to pay any penalties or taxes.

Contributions from both the employee and the relative with access are subject to the annual limits.

How Much Can You Contribute to Your 457(b) Plan?

For 2020, the 457(b) contribution limit is $19,500 for those under 50, with an optional catch-up contribution limit of $6,500 for those 50 or older. 

Additionally, employees who are within three years of retirement age as specified in the plan can make special 457(b) catch-up contributions

If you qualify for this in 2020, you can contribute up to double the annual limit, which is $39,000.

When Can 457(b) Plan Be Withdrawn?

You can withdraw your 457(b) contributions at any time without a penalty when you reach the retirement age.

However, if you take out the earnings before age 59 1/2, you will have to pay an extra ten percent tax on those withdrawals as well as interest.  

Also, even though you won’t need to pay any taxes or penalties for withdrawing your contributions, you do have to pay taxes on any earnings that are part of the withdrawal.

You must start withdrawing from your 457(b) plan when you reach 70 1/2 years old unless you are still employed by the tax-filing organization that sponsors the 457(b) plan. 

If this is not the case, you can continue to defer withdrawals until you retire.

457(b) Withdrawal Rules

In withdrawing your 457(b) contributions, you have three options:

  • A full withdrawal, which includes both the contributions and the earnings.
  • A contribution withdrawal, which includes only your contributions and not the earnings.
  • An earnings withdrawal, which includes only the earnings and not the contributions.

The 457(b) plan does not come with early withdrawal penalties if you leave your job. 

So, if you need to withdraw from your 457(b) contributions before you reach age 59.5 and you’ve left the job that provided you with the 457(b), you don’t have to worry about anything.

Pros of 457(b) Plan

There are a few benefits of enrolling in a 457(b) plan:

Pre-Taxed

The main benefit is that contributions to a 457(b) plan are pre-tax, which means you don’t have to pay income tax on the money that you contribute. 

This can lower your taxable income, and it can also save you money on taxes. 

Tax-Deferred

A 457(b) plan is that the earnings grow tax-deferred until you withdraw them, which can help your money grow faster. 

This means that you don’t have to pay any taxes on the money that you make from your investments until you retire and start withdrawing it. 

Many Employers Match Contributions

Another benefit is that many employers will match a percentage of your contributions. 

This means that for every dollar you contribute, your employer will also contribute a dollar, so your money will grow faster.

Cons of 457(b) Plan

There are also some disadvantages to enrolling in a 457(b) plan:

Lack of Flexibility

The main drawback is that if you leave your employer, you cannot take the money with you unless you move it into another 457(b) account or roll it into an IRA or other retirement account. 

This can be a problem if you switch jobs or retire before you reach age 59 1/2. 

Restricted Investment Options

Another downside is that the investment options are usually more limited than what you would find in other types of retirement accounts, such as 401(k)s

Mandatory Distributions at Age 70 1/2

The last disadvantage is that you are required to start withdrawing from your 457(b) plan at age 70 1/2, whether you’re still working or not. 

This can be a problem if you don’t need the money yet or if you want to keep it invested for longer.

The Bottom Line

A 457(b) plan is a type of retirement plan available only to public sector employees and certain types of tax-exempt organizations. 

It has several benefits, including being pre-taxed, tax-deferred, and containing many investment options for employers to choose from. 

However, it also comes with some restrictions on withdrawing the money, such as being unable to take it with you if you leave your job before age 59.5. 

Overall, the 457(b) plan is a good option for employees who want to save for retirement and have their money grow tax-free.

A 457(b) plan is a type of retirement account available only to public sector employees and certain types of tax-exempt organizations. It allows the employee to contribute a certain percentage of their income on a pre-tax basis.
A 457(b) plan allows the employee to contribute a certain percentage of their income on a pre-tax basis. The contributions and any earnings are tax-deferred until you retire and begin withdrawing them.
If you already work for a public sector employer, joining their retirement plan is usually the best option. If you don't, then it would be better to check out other options before deciding on whether or not to sign up for 457(b) contributions.
Employees can contribute to a 457(b) account, and in many cases, employers will also match employee contributions.
The pros of a 457(b) plan are that it is pre-taxed and tax-deferred. The cons are that it can be less flexible than other retirement plans and that you are required to start withdrawing money at age 70 1/2.

True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.

Leave a Comment