457(b) Deferred Compensation Plan

A 457 plan, also called a 457(b) deferred compensation plan, is a retirement savings choice available to specific employees in the United States. Here's a breakdown of how they work:

Who is eligible?

Employees of state and local governments.
Employees of certain tax-exempt organizations, such as some schools (check with your employer to see if they offer a 457 plan).

How do they work?

Like a 401(k), you contribute pre-tax dollars from your salary, reducing your taxable income for the year. The money grows in the account with tax-deferred benefits, meaning you don't pay taxes on the contributions or earnings until you withdraw them in retirement.

There are contribution limits, with the maximum being the lesser of 100% of your salary or a set annual dollar amount ($23,000 in 2024). There may also be catch-up contribution options for those nearing retirement.

Key features of 457 plans:

Tax advantage: Contributions are made with pre-tax dollars, lowering your taxable income.

Investment choices: You typically have a selection of investment options, like mutual funds, to potentially grow your retirement savings.

Traditional vs Roth: Some plans may offer a Roth option where you contribute after-tax dollars but qualify for tax-free withdrawals in retirement (conditions apply).

Withdrawals: Generally taxed as ordinary income in retirement. There may be exceptions for emergencies or upon separation from service from your employer.

No early withdrawal penalty: Unlike some retirement accounts, there's no 10% penalty for early withdrawals, but taxes will still apply.