Guide to 457(b) Retirement Plans: Distribution & Withdrawal Rules

A 457(b) plan is an employer-sponsored, tax-deferred retirement savings vehicle available to some state and local government employees. It works like a 401(k) in that employees can divert a portion of their pay to their retirement account. This provides an immediate tax break by reducing participants’ taxable income. There are a number of rules that come with 457(b) plans, though. These include contribution limits, rollover rules, withdrawal rules and more.

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How 457(b) Retirement Plans Work

Many public employees have the option of saving for retirement in a 457(b) plan. 457(b)s are most common with state and local government employees. Here are some specific examples:

Police officers
Firefighters
Paramedics
Public school teachers
Municipal employees, like sanitation workers
Government officers

These employees can opt to have money taken out of each paycheck and stashed in a 457(b) retirement account. Their take-home pay will shrink by the amount they contribute to the 457(b), meaning that their tax burden will also be lower.

The money in a 457(b) grows, tax-deferred over time. When the participant retires and starts to take distributions from their account, those distributions come with regular income taxes. A 457(b) is an example of a defined contribution plan. If you have access to one, you may also have access to a defined benefit pension plan.

Similar to how IRAs and 401(k)s come in a Roth variation, there are Roth 457(b)s. This lets you save after-tax dollars. To be clear, that means you won’t get a reduction on your taxable income now, but you will get the advantage of taking tax-free distributions when you hit retirement. Unlike a Roth IRA, which can you can open without the consent or participation of an employer, the Roth 457(b) requires employer sponsorship.

Not everyone who has access to a 457(b) has access to a Roth version. If you can’t use a Roth account, but you want to diversify your tax risk in retirement, you may consider opening a Roth IRA through a brokerage.

Contribution Limits for a 457(b) Account

For 2022, the 457(b) contribution limit is $20,500 for those under 50, with an optional catch-up contribution limit of $6,500 for those 50 or older. Additionally, employees who are within three years of retirement age as specified in the plan can make special 457(b) catch-up contributions. This amount will vary from employee to employee.

But what if your employer offers a 457(b) and another retirement plan? In that case, you can contribute to two plans simultaneously, doubling your retirement contributions in the process.

One more IRS rule: If you were saving through a 401(k) at, say, a private company, and then became a public school teacher with a 457(b) in the same year, your total contributions across both plans can’t top $20,500 for 2022.

Distribution Rules for a 457(b) Account

When it comes to withdrawals, 457(b) plans have a big advantage over 403(b)s and 401(k)s. They do not come with early withdrawal penalties if you leave your job. So if you need to tap into your 457(b) contributions before you reach age 59.5 and you’ve left the job that provided you with the 457(b), don’t fret. You will still, however, need to pay regular income taxes on that money.

By contrast, withdrawals from 401(k) and 403(b) accounts are taxed as regular income, in addition, to a 10% early withdrawal penalty. This lethal combination will deprive you of a significant portion of your payout. Ideally, you would let your retirement savings grow and mature in a 401(k) or 403(b), waiting to draw them until you reach retirement age.

The only exception to the above is the rule of 55. This dictates that 401(k) and 403(b) account holders who quit, are fired or are laid off during or after the year they turn 55 can make withdrawals penalty-free.

Comparing 457(b)s to Other Retirement Plans

One of the most important benefits 457(b)s have over 401(k)s and 403(b)s is the complete lack of early withdrawal penalties. This will be the case so long as you no longer hold the job through which your account comes from.

401(k)s and 457(b)s are also both defined contribution plans. 401(k) plans are available to employees in the private sector. If you’re currently an employee of a state or local government, you won’t be able to switch from a 457(b) to a 401(k) without changing jobs.

The 403(b) plan is very similar to the 457(b). In fact, public employees may have the option of choosing one or the other, or sometimes even both. So how can you select between the two plans?

Let’s say you decide to leave your job. This is called “separation from service.” At the time of separation, you might find yourself without an income while you’re looking for another job. If you have a 457(b), you can withdraw funds from the account without facing an early withdrawal penalty. But if you’ve been saving in a 403(b), you’ll take a 10% penalty surtax on any distributions you take before you hit age 59.5.

Although the elective deferral limits are the same for both 457(b)s and 403(b)s, 403(b)s have higher limits for total contribution. In this context, your “contribution” refers to the total of your elective deferrals, employer match and employer discretionary contributions. With a 457(b), any contributions your employer makes on your behalf count against your total contribution limit for the year.

Rollover Rules for a 457(b) Account

You can roll over a 457(b) into any other retirement account. The IRS breaks down what types of accounts you can roll over into what. For a 457(b) account, you can roll it over to pretty much any type of IRA account, a qualified plan or a 403(b) account. You cannot roll it over into a Roth account that isn’t an IRA (such as a Roth 401(k)). To roll over the account to a Simple IRA, you would need to wait two years.

If you’re looking to complete a rollover, pick a new plan and ask the new provider to give you tips on how to initiate the rollover. Your new provider will be able to help you navigate the bureaucracy that comes with getting your money and rolling it over. More importantly, by doing this, you should be able to avoid all tax penalties.

The Bottom Line

If you’re a public employee and have access to a retirement plan, you should be making contributions to save for the future. If you’re choosing between a 457(b) and 403(b), consider the pros and cons of each before making your decision – or opt to contribute to both. And don’t forget that you can still open a Roth IRA on your own time.

Tips for Your Retirement Plan

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