All contributions to 457 plans grow tax-deferred until retirement, when they are either rolled over or withdrawn. All withdrawals are taxable, regardless of the participant's age. Similar to 401(k)s and 403(b)s, all contributions into 457 plans grow tax free, but early withdrawals are not penalized.
Differences Between 457 Plans and 401(k) and 403(b) Plans
457 plans are not classified as qualified plans, and they are not bound by the same rollover and distribution rules as 401(k) and 403(b) plans. Originally, 457 plans were only available to state and local government employees, entities and 501(c)3 organizations. Looser restrictions now allow more employers to offer 457 plans in addition to other retirement plans.
Unlike 401(k) and 403(b) accounts, participants can take regular withdrawals from 457 plans as soon as they retire, regardless of whether they have reached age 59.5. These distributions are taxed as regular income, but the 10% early withdrawal penalty is never applied. Rather than withdrawing funds, participants may also roll their 457 plans into other qualified plans.
457 Plans Are Unique and Complicated
As the only non-qualified group plans available in the United States, 457 plans are unique and complex, offering several advantages over more popular deferred compensation plans. While more employers are offering 457 plans every year, they are not common. There are many different types of 457 plans, all with different characteristics; they are categorized as governmental or nongovernmental, and eligible or ineligible. Eligible plans are categorized as 457(b); non-eligible plans are categorized as 457(f), and they lack many of the benefits of eligible plans.