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How a 457(b) Plan Works After Retirement

Byline profile imageEdited by Jeff White, CEPF®
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Byline profile imageEdited by Arturo Conde, CEPF®
Byline profile imageReviewed by Brandon Renfro, CFP®, RICP, EA
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Retirement planning involves understanding what happens to your savings when you finally stop working. If you’ve been contributing to a 457(b) plan during your career, knowing how this account functions after retirement is essential for making informed financial decisions. Unlike other retirement accounts, a 457(b) plan offers unique advantages and flexibility when you’re ready to access your funds. These employer-sponsored plans, typically available to state and local government employees and some nonprofit workers, have distinctive withdrawal rules that set them apart from 401(k)s and IRAs.

A financial advisor can help you determine what to do with your retirement accounts or how to build wealth to achieve your retirement goals.

What Is a 457(b) Plan?

A 457(b) plan is a type of retirement savings plan available to certain employees of state and local governments, as well as certain tax-exempt organizations such as charities and religious organizations. It’s named after Section 457(b) of the Internal Revenue Code, which governs these plans. Here are six key features of a 457(b) plan to keep in mind:

  1. Employee contributions: Employees can contribute a portion of their salary to the plan on a pre-tax basis, meaning contributions are deducted from their paycheck before income taxes are applied. Some plans may also offer Roth 457(b) options, where contributions are made with after-tax dollars, but qualified withdrawals in retirement are tax-free.
  2. Employer contributions (if offered): Some employers may choose to contribute to their employees’ 457(b) plans, either through matching contributions or other forms of employer contributions.
  3. Tax deferral: Contributions to a traditional 457(b) plan grow tax-deferred, meaning that investment earnings are not taxed until withdrawn. This can potentially allow for greater accumulation of savings over time when compared with taxable accounts.
  4. Withdrawal rules: Withdrawals from a 457(b) plan are generally subject to income tax. However, if withdrawals are made after retirement or separation from service, they may be eligible for favorable tax treatment. Additionally, unlike many other retirement plans, there is no early withdrawal penalty for withdrawals before age 59 ½, although they will still be subject to income tax.
  5. Limits and eligibility: The maximum amount an employee can contribute to a 457(b) plan is determined by the IRS and may be subject to change each year. Employees who are eligible for both a 457(b) plan and another type of employer-sponsored retirement plan, such as a 401(k) or 403(b), can contribute to both and effectively double their contribution limits.
  6. Distribution options: Upon retirement or separation from service, participants can generally choose from various distribution options, including lump-sum payments, periodic payments or annuities.

It’s important for individuals considering a 457(b) plan to review the specific details and features of their employer’s plan, as these can vary. Additionally, seeking advice from a financial advisor can help individuals make informed decisions about retirement planning and investment options.

How Much Can You Contribute to a 457(b) Plan?

A 457(b) plan’s annual contributions and other additions to a participant’s account cannot exceed the lesser of 100% of the participant’s compensation or the elective deferral limit ($23,000 in 2025). If you’re over the age of 50, you may also qualify for catch-up contributions up to $8,000 more than that limit.

Unlike some other retirement plans, employer contributions to governmental 457(b) plans count toward your annual limit. This means if your employer contributes to your plan, it reduces the amount you can personally contribute. For non-governmental plans, the structure may differ, so it’s important to understand your specific plan’s rules.

If you participate in multiple retirement plans, such as a 403(b) or 401(k) alongside your 457(b) plan, you’re in luck. The IRS treats 457(b) contribution limits separately from other retirement plans. This means you could potentially contribute the maximum to both a 457(b) and another plan like a 403(b) in the same year, effectively doubling your tax-advantaged retirement savings.

How a 457(b) Plan Works After Retirement

A retiree deciding on a distribution option for his 457(b) plan.

Once an individual retires, active contributions to their 457(b) plan cease, as they are no longer receiving a salary from the employer that sponsors the plan. Retirees may decide to take a lump-sum distribution, opt for periodic payments or roll over the funds to an individual retirement account (IRA) or another eligible retirement plan, while still subject to income tax upon withdrawal.

Some plans may also offer annuitization options, which can provide a steady stream of income payments over a specified period or for life, depending on the terms of the plan.

Here are three common distribution options after retirement:

  • Lump-sum distribution: You can take the entire balance of your 457(b) account as a single payment.
  • Periodic payments: You can choose to receive regular payments from your 457(b) account over a set period, such as monthly or annually.
  • Annuity: You can use your 457(b) savings to purchase an annuity, which provides a stream of income for a specified period or for the remainder of your life.

Keep in mind that funds in your 457(b) account are typically subject to required minimum distributions (RMDs). Similar to other tax-deferred retirement accounts, like 401(k)s and traditional IRAs, you’re generally required to start taking withdrawals from your 457(b) plan once you reach age 73, unless you’re still working for the employer sponsoring the plan and you’re not a 5% owner.

These are general guidelines, and the specifics of how a 457(b) plan works after retirement can vary based on your plan’s rules and provisions. It’s advisable to consult with a financial advisor or tax professional to understand the implications of your choices and to develop a retirement income strategy tailored to your individual needs and circumstances.

Tips for Maximizing Your Retirement Savings Across Multiple Accounts

Building a secure financial future requires strategic management of your retirement accounts. By understanding how to optimize contributions and allocations across different retirement vehicles, you can create a more robust nest egg for your golden years.

  • Diversify your retirement account types: Balance your savings between tax-deferred accounts (traditional 401(k)s and IRAs), tax-free accounts and taxable brokerage accounts. This strategy creates tax diversification, giving you flexibility during retirement to manage your tax burden by drawing from different account types based on your needs and tax situation.
  • Maximize employer matches first: Always contribute enough to your employer-sponsored retirement plan to receive the full company match before funding other accounts. This approach instantly doubles your money with the matching portion, representing an immediate 100% return on investment that you won’t find elsewhere.
  • Consider the “mega backdoor Roth” strategy: If your 401(k) plan allows after-tax contributions beyond the standard limits, you may be able to convert these funds to a Roth account. This advanced technique enables high-income earners to place significantly more money into tax-free growth vehicles than would otherwise be possible through standard contribution limits.
  • Coordinate spousal retirement savings: Married couples should view retirement planning as a unified strategy, potentially maximizing contributions to the account with the best benefits or investment options. For couples with income disparities, consider a spousal IRA to ensure both partners build retirement assets even if one has limited earned income.

By thoughtfully implementing these tips for maximizing your retirement savings across multiple accounts, you’ll create a more resilient financial foundation. Remember that retirement planning is a marathon, not a sprint—consistent contributions and strategic allocation decisions over time will help secure your financial future.

Bottom Line

457(b) participants nearing retirement have the option to double the standard limit under certain conditions.

The 457(b) plan can be a valuable retirement savings vehicle, offering no early withdrawal penalty and special catch-up contributions for public sector and nonprofit employees. As retirement approaches, it’s important to develop a personalized withdrawal strategy that considers tax implications, changing life circumstances and market conditions.

Tips for Retirement Planning

  • A financial advisor can help you make a retirement plan and build wealth to make sure you save enough. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Consider using a retirement calculator to help you see whether you’re saving enough for the retirement you want.

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