A 457 plan is a retirement savings plan that is sponsored by an employer. Employees can contribute pretax dollars to the plan, and the funds can be used to supplement other retirement income sources, such as a 401(k) or an IRA. The money in a 457 plan grows tax-deferred, and withdrawals are taxed as ordinary income.
There are two types of 457 plans: deferred contribution plans and Roth contribution plans. In a deferred contribution plan, employees contribute pretax dollars to the plan, and the funds grow tax-deferred until they are withdrawn. Withdrawals are taxed as ordinary income. In a Roth contribution plan, employees contribute after-tax dollars to the plan, and the funds grow tax-free. Withdrawals are tax-free, as long as the account has been open for at least five years.
457 plans have some similarities to 401(k) plans, but there are also some key differences. One difference is that 457 plans can be offered by both public and private employers, while 401(k) plans can only be offered by private employers. Another difference is that contributions to a 457 plan are not subject to the annual contribution limit of $18,500 (or $24,500 for employees age 50 and over).
If you are employed by a state or local government entity, you may also be able to participate in a 403(b) plan. Like a 457 plan, a 403(b) plan is a retirement savings plan that is sponsored by an employer. Employees can contribute pretax dollars to the plan, and the funds can be used to supplement other retirement income sources. The money in a 403(b) plan grows tax-deferred, and withdrawals are taxed as ordinary income.