457 Plans Explained: A Smart Retirement Option for Public Workers
Written by
Andrew Lisa
Edited by
Nupur Gambhir
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Planning for retirement isn’t just a private-sector concern. If you work for a state or local government, or certain nonprofit organizations, you may have access to a 457(b) plan — a tax-advantaged retirement savings option designed specifically for public sector employees. Similar in many ways to a 401(k), a 457 plan allows you to contribute a portion of your salary into an investment account, helping you grow your retirement savings while deferring taxes.
In this guide, we’ll break down how 457 plans work, their key benefits, and how they compare to other retirement plans so you can make the most of what’s available to you.
What Is a 457 Plan?
A 457 plan is a tax-advantaged retirement fund that allows qualified state and local government employees, as well as some nonprofit workers, to save on a pre-tax basis. That makes them similar to employer-based 401(k)s, but 457 plans have unique withdrawal and contribution rules that make them even more flexible.
How a 457 Plan Works
Here’s how 457 plans work:
- Withdrawals are taxed as ordinary income, just like with a 401(k)
- Contributions to a 457 plan are made with pre-tax income, reducing your taxable income for the year
- Funds are typically invested in ETFs, mutual funds, and target-date funds, similar to a 401(k)
- Investment growth is tax-deferred — you won’t pay taxes on gains until you withdraw the money
457 Plan Contribution Limits
Another similarity with 401(k)s is the maximum contribution limits, which the IRS caps at $23,500 in 2025, with $7,500 extra in catch-up contributions for those age 50 and up, for a total of $31,000.
457 Plan Catch-Up Advantage for Older Savers
If you’re nearing retirement and enrolled in a 457 plan, you may be eligible for a “final three-year catch-up” provision — a unique benefit not available with 401(k)s.
During the three years before your plan’s normal retirement age, you can contribute up to double the standard limit — as much as $47,000 per year — if you didn’t max out contributions in previous years. This can be a powerful way to boost your retirement savings late in your career.
457 Plan vs 401(k) and 403(b)
457 plans, 401(k)s and 403(b) accounts have similar tax benefits and contribution limits, but with a few crucial differences in structure and the kinds of employers that offer them.
| Retirement Plan Type | 457 Plan | 401(k) | 403(b) |
|---|---|---|---|
| Who Offers Them? | State and local governments; some nonprofits | Private-sector employers | Public schools; some tax-exempt organizations |
| Contribution Limits | 23,500 or $31,000 for those 50 and up. A special three-year catch-up period allows up to double the maximum for account holders who fell behind. | 23,500 or $31,000 for those 50 and up | 23,500 or $31,000 for those 50 and up |
| Tax Treatment | Funded with pretax contributions, which grow tax-deferred; withdrawals are taxed, but no penalty for early withdrawals. | Funded with pretax contributions, which grow tax-deferred; withdrawals are taxed in retirement. 10% penalty plus regular income tax for early withdrawals before 59 1/2. | Funded with pretax contributions, which grow tax-deferred; withdrawals taxed in retirement. 10% penalty plus regular income tax for early withdrawals before 59 1/2. |
457 Plan Withdrawal Rules
If you’re planning to retire early or want more flexibility in how and when you access your retirement savings, understanding the differences between 457 plans and other pre-tax accounts is key. One of the most significant advantages of a 457 plan is how it handles early withdrawals.
| Feature | 457 Plan | 401(k)/403(b) Plans |
|---|---|---|
| Early Withdrawal Penalty | No penalty if you leave your job, regardless of age | 10% penalty for most withdrawals before age 59½ |
| Tax on Withdrawals | Taxed as ordinary income | Taxed as ordinary income |
| Hardship Exceptions | Not required for penalty-free access upon separation | Required for early access without penalty |
| Best For | Those planning to retire early or seeking flexibility | Those retiring at or after traditional retirement age |
This built-in flexibility makes 457 plans especially attractive for public workers who are planning to retire before 60 or want easier access to their funds if they leave their job.
Pros and Cons of a 457 Plan
Consider the benefits and drawbacks of 457 plans before you open one.
Pros
- High contribution limits
- Penalty-free withdrawals after leaving a job
- Catch-up contribution options for late savers
Cons
- Limited to public employees and select nonprofits
- Fewer investment options compared to IRAs
Bottom Line
A 457 plan is a powerful retirement savings tool for public and nonprofit employees — especially if you’re planning to retire early or want the option to access your funds without penalties after leaving your job. Its tax advantages, investment growth potential, and flexibility make it a standout choice compared to traditional retirement accounts.
To make the most of your plan, check with your employer about your contribution limits, investment options, and any catch-up provisions available as you near retirement. Every dollar you put away now can help secure a more comfortable and flexible financial future.
