When it comes to workplace retirement plans, the widely used 401(k) and 403(b) plans tend to grab the spotlight. But there's also a third type of plan that many workers may not be aware of: the 457(b).
These tax-advantaged plans boast a number of similarities to their counterparts and enable individuals to save toward their financial goals, but they also have several features all their own. Among them is a catch-up provision that allows older employees to quickly boost their retirement assets before leaving the workforce and pursuing their other passions.
Here are the key details to know about this option.
What is a 457(b) plan?
Like other workplace plans, the 457(b) plan is named after the section of the IRS code that governs its use. It's a retirement vehicle that's available to two categories of employees:
- Employees of state and local governments or public schools
- Managers or highly compensated employees at tax-exempt organizations (excluding religious organizations)
What is a Roth 457(b)?
As with its retirement plan cousins, employers may offer a
Investment options in a 457(b)
If you work for a government or nonprofit entity that offers a 457(b), you may notice that your investment options look similar to other employer-sponsored plans. Typically, the organization will offer a select menu of
Contribution limits for 457(b) plans
The IRS sets annual contribution limits for 457(b) plan participants.
- 2023 contribution limit: $22,500
2024 contribution limit: $23,000
One aspect that makes 457(b) plans different is that the contribution limit is separate from those of any other plan you might have through your employer. Your employer can stipulate which plan or plans you can or cannot participate in, but if you also are able to contribute to a 403(b) plan, for example, in 2024 you can invest up to $23,000 in the 403(b)—plus an additional $23,000 into your 457(b). That can add up to an incredibly powerful way to increase your tax-advantaged retirement contributions.
457(b) catch-up contributions
Like other workplace plans, employees aged 50 and older can make
- Catch-up limit: $7,500
However, 457(b) plans provide a separate catch-up provision for participants within three years of their normal retirement age as defined by their plan. Workers nearing retirement can contribute up to two times the usual under-age-50 limit as long as they don't exceed the amount of the unused contributions they were eligible to make in prior years. These special 457(b) catch-up contributions also cannot be more than the employee's compensation in a given year.
These more generous limits offer a great second chance for employees who couldn't afford to maximize retirement contributions when they were younger but are looking for a way to boost their investment balance prior to retirement. Just be aware that it's a one-or-the-other proposition: If you take advantage of the special 457(b) catch-up rules, you can't use the over-age-50 catch-up amount, too. The catch-up rules for a 457(b) are more complicated than other retirement plans, so you may want to consult with a tax professional or financial advisor to know for sure how much you can contribute.
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457(b) withdrawal rules & exceptions
One potential downside for individuals with a 457(b) is that it can be difficult to access funds before retirement. For example, you're generally not allowed to make a withdrawal while still working for the plan sponsor. And often you can't take out a loan like you can with many 401(k) plans. But in certain cases, your employer and plan may offer what's called a hardship distribution in the event that an unforeseeable emergency arises related to you or your family's health and well-being, such as:
- You, your spouse or your dependents are affected by an illness or injury.
- You incur property loss due to an event outside your control, such as severe weather.
- You need to pay funeral costs following the death of your spouse or dependent.
You can also take an early distribution if you leave your job or your employer terminates the plan. Like with other retirement plans, 457(b)s are also subject to
- In the case of an individual who attains age 73 before 2033, the age for starting RMD is age 73.
- In the case of an individual who attains age 74 after 2032, the applicable age is 75.
The amount of your RMD is based on your account balance and your actuarial life expectancy. The
Unlike 401(k)s and 403(b)s, there's no 10% withdrawal penalty if you qualify for one of the aforementioned exceptions and take money out before age 59½. That can make drawing from your retirement account an enticing proposition if you face financial hardship. Just remember that doing so can erode a source of income that you likely will need for retirement and prevent those funds from potentially growing over time.
Distributions from a 457(b) during retirement
Depending on the individual plan, you may be able to access your funds any time after you end your employment with the plan sponsor. You often can do this through a lump-sum payout, a series of installments or a combination of both. Some plans also allow you to convert your balance into an annuity that provides a guaranteed income stream for the remainder of your life and potentially the life of your spouse.
Options for 457(b) accounts if you leave your job
Should you separate from the employer sponsoring your 457(b) plan, you have a few options. Among them are withdrawing your funds or simply leaving them in the plan.
You also may be able to
The bottom line
Having a well-planned savings strategy is vital to securing your financial future and enabling you to give back in retirement. Connect with a