Like a 401(k), But Not: What Is a 457 Retirement Plan?

Saving for retirement is one of the most important things you can do for your future. After all, taking advantage of long-term compounding returns is the most efficient way to build wealth during your working years. Not every workplace offers access to a 401(k), but depending on your employer, other types of retirement plans may be available.

What is a 457 plan? It’s a comparable retirement plan that is often offered to local government workers and some nonprofit employees. Here’s what you need to know if a 457 retirement account is available to you.

Who Can Contribute to a 457(b) Retirement Plan?

There are two main types of 457 retirement plan: the 457(b) and the 457(f). Because the 457(b) is the most common, that’s what we’ll focus on here. (Not many employees have access to a 457(f). They’re usually highly compensated nonprofit employees, such as those who work high up in hospital administration. Some highly compensated government employees may have 457(f) plans.)

Who likely has access to a 457(b) retirement account? Typically:

• State and local law enforcement officers
• Firefighters
• State and local civil servants

You can only contribute to a 457 retirement plan if your employer offers one. There is no “solo” plan, as there is with a 401(k). But there are some interesting quirks to the 457(b) plan that might make it an attractive choice for eligible investors.

457(b) Contribution Limits

Like other defined-contribution plans such as the 401(k) and 403(b) retirement plans, the Internal Revenue Service (IRS) limits the amount you can put into a 457(b) plan each year. For 2019, the contribution limit is $19,000, with a catch-up limit of $6,000 for those who are 50 or older.

There is also a Roth version of the plan that allows you to invest money on an after-tax basis.

One of the interesting twists with the 457(b) retirement plan is that if you’re in the last three years before retirement age, you may be able to make catch-up contributions of double your annual limit. Confirm with your employer to make sure you meet the criteria, and keep in mind that you can never contribute more than 100% of your salary to a 457(b) plan.

Another potential benefit to a 457(b) retirement account is that you can preserve contribution room from year to year if you’re not using the over-50 catch-up contribution. For example, let’s say you contributed $13,000 to your 457(b) retirement plan in 2018. The contribution limit that year was $18,500, so that left you with $5,500 that you could’ve contributed, but didn’t.

Even if you’re not 50 years old, you may be able to shift that $5,500 to 2019—on top of the current $19,000 limit. So, with the preserved contribution room, you could actually add $24,500 to your 457(b) plan.

It’s possible to use 457(b) retirement accounts in conjunction with other plans. If you have access to a 401(k) as well as a 457(b), you can contribute to both plans, bringing your total retirement plan contributions to $38,000 in 2019.

Consider checking the fine print of your 457(b) plan to find out what it specifies as the “normal retirement age.” If you’re three years out from that age, you can contribute double the maximum amount, meaning $38,000 for 2019.

457(b) Taxes and Withdrawal Penalties

You can choose to make tax-deferred or Roth contributions, depending on your tax situation and what your employer offers. When it comes time to take distributions from the 457(b) retirement account, you pay taxes based on the type of contributions you made. Just as with 401(k) and 403(b) plans, 457(b) plans are subject to required minimum distributions (RMDs) when you reach age 70 1/2.

Interestingly, the 457(b) retirement plan has a little twist when it comes to withdrawing money before age 59 1/2. If you resign or retire before that age and you need to withdraw your funds, you don’t end up with the customary 10% penalty. You still have to pay taxes on the amount withdrawn, but the early withdrawal penalty won’t apply.

Another thing to keep in mind is that 457(b) plan contribution limits include both employer and employee contributions. So for 2019, combined employer/employee contributions can’t exceed $19,000 (plus the catch-up contribution, if allowed). This is a bit different from the 401(k), where you can contribute up to $19,000 with the total employer and employee contributions limited to $56,000 (plus any catch-up contributions).

One other consideration with a 457(b) plan is that the maximum contribution is either 100% of your compensation or the deferral limit of $19,000 for 2019 (whichever is lower).

457(b) Bottom Line

Like the 401(k) and the 403(b), the 457(b) can be a great choice for employees who are looking to make contributions to an employer-sponsored retirement plan. There are similarities between the 457(b) retirement plan and other defined-contribution plans, but there are also some slight differences that can make it attractive in different ways.

Carefully consider your long-term planning needs and the availability of different plans as you decide what’s likely to work best for you.