457 plans: The retirement option for nonprofit and government workers

• A 457 plan is a type of retirement plan offered by government and nonprofit organizations.
• 457 plans allow you to defer a portion of your pay, invest in various assets, and pay taxes upon withdrawal.
• Many employers offer 457 plans in tandem with other retirement options.

A 457 plan is a type of deferred compensation plan for workers in the government and nonprofit sectors. It allows employees to set aside a portion of their earnings, push back taxes on that income, and grow their money in the process.

"It's part of the retirement plan family," says Frank Murillo, partner and managing director at Snowden Lane Partners. "On the surface, think '401(k)' for government and nonprofit employees."

Do you work for a non-profit or government organization? Here's what you need to know about 457 plans.

How does a 457 plan work?

With a 457 plan, you defer part of your income, use it to invest in annuities and mutual funds, and grow those earnings until a later date. Only nonprofit and governmental organizations can offer 457 plans, though they can be used in tandem with other retirement accounts, including 401(k)s and 403(b)s.

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Contributions on 457 plans are largely made by the participant using paycheck deductions, but employers have the option to contribute funds as well. Either way, there's one set contribution limit across both buckets.

Generally speaking, participant contributions are tax-deferred, meaning you pay taxes when you withdraw funds later on. With some governmental 457(b)s, which is one type of 457 plan we'll cover later on, you may have the option to designate Roth contributions, which are made using after-tax dollars.

One standout advantage of 457 plans is that you can begin withdrawing your 457 funds as soon as you no longer work for the plan's sponsoring organization. This is quite different from other retirement plans, such as IRAs and 401(k)s, which require you to be 59 ½ before you can withdraw from your account.

Quick tip: If you have a 457 plan, you'll have to take Required Minimum Distributions (RMDs) from your account starting at age 72. The exact annual amount varies based on your age, your balance, and other factors. Use this calculator to determine what you may owe.

457(b) contribution limits

The contribution limits for a 457(b) depend on your age. Once you hit 50 or when you're nearing retirement, you may be able to contribute significantly more depending on what you contributed in previous years.

Here's how those contributions look:

Age	Contribution limit
< 50	100% of your salary or $19,500, whichever is less
50 or older	$26,000 ($19,500 + $6,500 in catch-up contributions)
Within three years of retirement age, as specified by the plan	$39,000 or the base limit ($19,500), plus the amount of your unused base limit in prior years, whichever is less

Quick tip: The catch-up contributions allowed for participants 50 or older are only allowed if you have a governmental 457(b). If you're enrolled in a nonprofit 457(b), your limit will be $19,500.

Types of 457 plans

There are two types of 457 plans: the 457(b) and the 457(f).

• 457(b): These are what the IRS refers to as "eligible" deferred compensation plans. They're subject to all IRS contribution limits and taxation rules, and both employers and participants can contribute to them. There's a 457(b) option for governmental employers, as well as a 457(b) for nonprofits and tax-exempt organizations.
• 457(f): These plans are also for nonprofits and government agencies, but they don't have to adhere to the IRS contribution limits. They're also fully funded by the employer, allowing employers to tie the benefit to performance, service duration, or other metrics. According to the IRS, these are sometimes called "golden handcuff" plans.

"457(b) plans work very similar to a 401(k) or 403(b), where the elective deferral amount is funded on a payroll-by-payroll basis," says Brian Haney, founder and vice president at The Haney Company. "For 457(f) plans, these are far more discretionary and often funded in a lump sum depending on when the employer chooses to fund them."

Pros and cons of a 457 plan

As with any investment account, the 457 plan comes with both drawbacks and advantages. One upside: They allow you to reduce your taxable income and defer taxes to a later date. If you think you will be in a lower tax bracket upon retirement, this can be financially advantageous.

They can also be used in tandem with other accounts - another major perk.

"They become extremely helpful and valuable vehicles to allow for higher earners to further defer income towards retirement," Haney says. "Many highly compensated professionals max out their 401(k)s and 403(b)s and could use additional resources to save more."

On the downside, some 457 plans don't allow rollovers to other retirement accounts. They also come with RMDs, and any employer contributions count toward the participant's annual limit.

Pros	Cons
Allows you to defer taxes Large contribution limits, especially as your near retirement Can be used along with other retirement accounts Can allow Roth contributions Allows withdrawals as soon as you no longer work for the employer	Come with Requirement Minimum Distributions Some don't allow rollovers to other retirement accounts Employer contributions eat into the participant's contribution limit Lower contribution limits than other retirement plans (403(b)s go up to $58,000)

457(b) vs. 403(b)

It's easy to confuse 457(b) plans with 403(b) plans, as both are offered in the nonprofit sector. In some cases, employers may even offer both plans simultaneously.

Despite this, the two are vastly different retirement options. For one, employer contributions and participant contributions come with different limits on 403(b)s. On these plans, both contributions can total up to $58,000 or 100% of the employee's salary per year (whichever is less).

Rollovers are also permitted on all 403(b)s, but only sometimes on 457 plans, and 403(b)s come with a 10% penalty if funds are withdrawn before 59 ½. With 457(b)s, you can withdraw as soon as you no longer work for the company.

Here are all the differences you'll want to consider with these two retirement options:

457 plan	403(b)
Employer contributions count toward the $19,500 participant limit. Rollovers are permitted only on government plans. Funds can be withdrawn as soon as you no longer work for the company.	Employees have their own limit of $19,500. Combined limits go up to $58,000 or 100% of the employee's salary. Rollovers to other retirement plans are always permitted. Withdrawals before 59 ½ face a 10% penalty.

The financial takeaway

A 457 plan is a type of retirement plan offered to non-profit and government employees. They allow you to defer income, invest in various assets, and grow your wealth for retirement.

Keep in mind, though: They do have lower limits than some other retirement plans, so make sure to explore all your options. In many cases, you may be able to choose both a 457 and another plan to maximize your contributions. Talk to a financial advisor if you're not sure a 457 plan is right for your retirement goals. They can also assist in determining an appropriate contribution amount.

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