457 Plan

What Is a 457 Plan?

A 457 plan is a deferred compensation arrangement that lets eligible workers set aside part of their pay for retirement. The plan takes its name from Section 457 of the U.S. Internal Revenue Code. Most participants work for state or local government agencies, though some tax-exempt organizations also offer these plans. Savings grow over time and are typically paid out after the employee retires or leaves the job.

How It Works

Most 457 plans are 457(b) plans, which are usually funded with pre-tax contributions deducted from each paycheck. Contributions generally lower current taxable income, and investment earnings are not taxed each year. Withdrawals are taxed as ordinary income when they are paid out.

Employers may also contribute on the employee's behalf, and some employer amounts may be subject to a vesting schedule that determines when the employee fully owns them.

Governmental 457(b) plans must hold their assets in trust for participants, which protects the money from the employer's creditors. Plans sponsored by tax-exempt organizations generally do not have this protection, so their funds remain subject to the employer's creditors.

A notable feature is that distributions from a governmental 457(b) plan after leaving the job are generally not subject to the 10% early withdrawal penalty that applies to many retirement accounts taken before age 59½. Regular income tax still applies.

Key Points for Investors

• Annual contribution limits are set by law and change over time, so current IRS guidance should be checked.
• Account holders must begin taking a required minimum distribution once they reach the age set by law.
• Money may be moved to another eligible plan or an IRA through a rollover, depending on plan rules.
• Because a 457 plan's investment options and terms are defined by the specific plan document, the details vary from one employer to another.