457(b)

Also called deferred compensation plan

A deferred compensation retirement plan for state and local government workers and some nonprofit employees, with its own separate contribution limit.

What it means

A 457(b) lets eligible employees defer part of their pay into a retirement account, usually before income tax, where it grows tax-deferred. Most are offered by state and local governments to workers such as police officers, firefighters and public administrators. Some tax-exempt organizations offer non-governmental versions for select highly paid employees.

Two features stand out. First, the contribution limit, set each year by the IRS, is separate from the 401(k) and 403(b) limit, so someone with access to both a 403(b) and a 457(b) can save in each. Second, withdrawals from a governmental 457(b) after leaving the employer are not subject to the 10% additional tax, even before 59½, though regular income tax still applies. Non-governmental plans carry more risk because the money remains an asset of the employer until paid out.

Example

For example, a city employee who retires at 52 could withdraw $20,000 from a governmental 457(b) and owe ordinary income tax on it, but not the 10% additional tax that a 401(k) withdrawal at that age would usually trigger.

How it’s used

Public employees saving beyond a pension
Workers planning to retire before 59½
Doubling up savings alongside a 403(b)

Strengths and weaknesses

Strengths

Separate limit allows extra tax-advantaged saving
Governmental plans allow withdrawals after leaving the job without the 10% additional tax
Tax-deferred growth, with a Roth option in some plans

Weaknesses

Non-governmental plans can be lost to the employer’s creditors
Non-governmental plans have restricted rollover options
Employer matches are less common than in 401(k) plans

Good to know

Confirm whether a 457(b) is governmental or non-governmental; the rules and risks differ significantly.

Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.