TECHNICAL GLOSSARY

What Is a 457(b) Plan?

A 457(b) plan is not a qualified retirement plan as defined by the federal government. Instead, these plans are typically sponsored by a state or local government employer or a tax-exempt organization. The letter "b" refers to section 457 of the Internal Revenue Code, the section that describes and governs 457(b) plans.
Employees that participate in a 457(b) plan will have the ability to defer part of their earnings prior to taxation, which reduces their current income tax liability, and provides a means to save for retirement. Investment earnings in a 457(b) plan are also tax-deferred until the employee withdraws them, which results in a greater amount available for employees when they retire

Who Is Eligible for a 457(b) Plan?

457(b) plans are typically available to:

• State and local government employees
• Employees of qualifying nonprofit organizations

Eligibility rules and plan details are set by the employer and must comply with IRS regulations.

457(b) Contribution Limits

The standard contribution limit for 457(b) plans will be $23,000 for 2024; however, employees older than age 50 may make a catch-up contribution of $7,500 to increase their total contributions.

Tax Treatment of a 457(b) Plan

• Contributions are generally pre-tax, lowering taxable income
• Earnings grow tax-deferred
• Withdrawals are taxed as ordinary income

Unlike qualified retirement plans, a 457(b) is classified as non-qualified, meaning it follows different IRS rules than 401(k) or 403(b) plans.

457(b) Withdrawal Rules

No Early Withdrawal Penalty

One of the biggest advantages of a 457(b) plan is that withdrawals are not subject to the 10% early withdrawal penalty, even if taken before age 59½. However, income taxes still apply.

When Withdrawals Are Allowed

• Separation from service (retirement or job change)
• Unforeseeable emergency, such as severe illness or property loss
• Required Minimum Distributions (RMDs) must begin by April 1 of the year following the year you turn 73, per current IRS rules

Rollover Options

After leaving your employer, you may roll over your 457(b) balance into:

• A traditional IRA
• A 401(k) or 403(b) plan
• Another eligible 457(b) plan

A proper rollover allows you to defer taxes on the transferred amount.

457(b) vs. 401(k) and 403(b)

While all three plans offer tax-deferred retirement savings, the 457(b) stands out due to:

• No early withdrawal penalty
• Special catch-up contribution rules
• Availability primarily to government and certain nonprofit employees