457(b)
A 457(b) deferred compensation plan is a type of tax-advantaged retirement savings account that certain state and local governments and tax-exempt organizations offer employees. Think: law enforcement officers, civil servants, and university workers. When you open a 457(b), typically you set aside pre-tax dollars in the account, reducing your income. Money in the account can be invested and potentially grow until you make withdrawals, at which point you'll pay income taxes on what you take out. Depending on your employer plan there may be a Roth option, where you contribute post-tax dollars and then don't have to pay taxes when you take that money out.
The 457(b) or eligible plan, functions similarly to 401(k)s and other qualified plans. The arrangement allows both employer and employee contributions, though total contributions are limited to IRC 402(g) maximums in any given year, which are low, thus, this plan is typically partnered with another. Employees are typically 100% vested at all times.
How It Works
Governmental 457(b) Plan
Governmental 457(b) plans are sponsored by a government entity. Like with 401(k)s, your contributions are held in a trust and can't be claimed by your employer's creditors. Money saved in a governmental 457(b) can be rolled into other retirement accounts, such as IRAs and 401(k)s.
Non-governmental 457(b) Plan
A non-governmental 457(b) plan, sometimes called a tax-exempt 457(b) plan, is backed by the offering company—perhaps a college or other nonprofit. In a non-governmental 457(b), you tell your employer the percentage of your income you'd like to contribute, but the employer owns the account—not you. If that employer runs into trouble with creditors, your funds could be at risk.
Also, because the account is your employer's and not yours, you can't roll over funds from a non-governmental 457(b) plan into another retirement account and you may not have control over how the funds may be invested. And you can't take a loan backed by the funds in your non-governmental 457(b), like you can with a governmental plan. Another key difference: Whereas you could be automatically enrolled in a governmental 457(b), you have to elect to participate in a non-governmental plan.
Applicable
Keep in mind that 457(b) withdrawals are subject to income tax and wage tax (for non-governmental plans), meaning they must be reported as taxable income on that year's tax return. Still, withdrawals can generally happen at any time penalty-free as long as you're no longer employed by the plan sponsor—or if the plan sponsor stops offering the plan.
Key Considerations
457(b) plans are tax-advantaged, employer-sponsored retirement plans offered to some government employees, as well as employees of certain tax-exempt organizations.
457(b) plans are split into 2 different categories—governmental and non-governmental—depending on whether you work for the government or not.
Although similar to 401(k)s and 403(b)s, 457(b)s have unique features that could offer more flexibility.
