Understanding the 457 Plan

A Comprehensive Guide to Retirement Savings
The 457 Plan
The 457 PlanA Comprehensive Guide to Retirement Savings

A 457 plan provides valuable retirement savings opportunities designed for state and local government employees and specific nonprofit organisations. Much like the private sector's 401(k) plan, it provides tax benefits by enabling pre-tax contributions, thus lowering taxable income and deferring taxes until retirement.

This article delves into the details of 457 plans, covering their varieties, contribution limits, and withdrawal rules, aiding individuals in making well-informed choices regarding their retirement financial strategies.

What exactly does the 457 Plan mean?

A 457 plan stands as a retirement savings avenue tailored for state and local government employees, along with specific nonprofit organisations. It mirrors the tax advantages seen in private sector 401(k) plans. Within this framework, employees can channel a portion of their earnings pre-tax into an account, effectively reducing their taxable income for the fiscal year and postponing tax obligations until withdrawal during retirement. Depending on the employer's discretion, a Roth variant of the 457 plan might allow for after-tax contributions.

There are two main types of 457 plans: the 457(b), typically extended to state and local government staff and nonprofit personnel as a tax-favoured retirement savings vehicle, and the 457(f), exclusively accessible to highly compensated executives in tax-exempt entities, which complements the 457(b) by deferring compensation.

Participants in a 457 plan can contribute up to 100% of their salaries, subject to yearly dollar limits. Taxes on interest and earnings within the account are deferred until withdrawal, except in the case of the Roth option, where only post-tax funds are deposited.

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Different Types of 457 Plans

There are two primary types of 457 plans: the 457(b) and the 457(f).

The 457(b) Plan

This plan is typically accessible to civil servants, law enforcement officers, and employees of governmental agencies, public services, and nonprofit organisations such as hospitals and religious institutions. Similar to a 401(k), participants divert a portion of their income into a retirement account, with the flexibility to select investment options like mutual funds and annuities. The account experiences tax-deferred growth until retirement withdrawal, with contribution limits enabling employees to stash away up to 100% of their salary, within specified annual dollar thresholds. Notably, individuals nearing retirement age may have access to specific catch-up provisions for contributions to a 457(b) plan.

The 457(f) Plan

In contrast to the 457(b), the 457(f) plan, also known as a Supplemental Executive Retirement Plan (SERP), is tailored exclusively for highly compensated executives in tax-exempt organisations such as hospitals and universities. This plan complements the 457(b) by permitting employers to make supplementary contributions to the executive's retirement account beyond standard limits, often negotiated through contractual deferred salary adjustments. However, if the executive departs before a predetermined vesting period, these contributions may be subject to forfeiture. The 457(f) plan functions as a strategic tool for executive retention, often called "golden handcuffs."

Comparing 457(b) and 403(b) Plans

For public sector workers, discerning the disparities between the 457(b) and the 403(b) plans holds significant importance. Both are prevalent benefits, particularly within professions such as public school education. Originating in the 1950s, the 403(b) initially centred on offering annuities exclusively. However, nowadays, participants enjoy the flexibility to invest in mutual funds as well.

Over time, the 403(b) has gradually transformed to resemble the 401(k) plans in the private sector, but with comparatively fewer investment options. Interestingly, both plans boast identical annual contribution limits, mirroring those of the 457(b) and 401(k) plans. Consequently, if you're a public employee, your employer might offer a 457(b) or a 403(b).

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457(b) Withdrawal Guidelines

Withdrawals from your 457(b) account come with specific regulations to adhere to. While you can withdraw funds early in case of an unexpected emergency without incurring a tax penalty, it's generally not advisable as it depletes your retirement savings, and you'll still be liable for income tax on the withdrawn amount for that year.

Additionally, it's important to be aware of the Required Minimum Distribution (RMD), which is the minimum amount you must withdraw from your 457(b) annually after reaching a certain age.

The IRS has a worksheet to figure this out. If you were born between 1951 and 1959, you need to start withdrawing at age 73. For those born in 1960 or later, it's age 75. This age changed from the previous requirement of 72.


In summary, delving into the intricacies of 457 plans empowers employees to make sound financial choices for their retirement. Whether selecting the 457(b) or the 457(f), participants benefit from tax advantages and flexible contribution options tailored to their employment sector. 

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