A 457(b) retirement plan is a tax-advantaged deferred compensation retirement plan available to qualifying physicians through their workplace. The 457 refers to the section of IRS code that formulated the plan and dictates the rules and regulations, including its tax advantages. One of the key questions that doctors on our online physician communities will ask if someone asks about whether they should contribute to a 457b retirement plan is whether the plan is a governmental plan or a non-governmental plan, as the recommendations in each situation may vary significantly. Understanding the differences between governmental and non-governmental 457(b) retirement plans is key to understanding whether these are the right plans for you. In this article, we’ll discuss the types of 457 plans, pros and cons of these plans, and key distinctions between the types of 457 plans, including distribution and taxation rules.
Disclaimers/Disclosures: As always, you should consult appropriate expertise before taking action based on this content, which is not individualized to your personal situation and can not be guaranteed to be accurate or up to date. While we have attempted to explain this to the best of our ability, we are not accountants and this is complex information that can be misinterpreted or unclear. To learn more, visit our disclaimers and disclosures.
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What are 457b plans?
With a 457(b) plan, both you as the employee and your employer can together contribute up to the annual contribution limits to your plan. An employer can do this as an employee benefit or as a matching incentive. As an employee, you make contributions through deductions taken directly from your salary.
This operates similar to how 401(k) plans work. These “eligible” plans are subject to additional regulations that dictate annual contribution limits and when the benefits of the plan are payable. These plans are typically tax deferred, where the contributions are taken from your pre-tax earnings, then distributions are taxed when you withdraw the funds, ideally during retirement.
Unlike a 401(k) plan, however, 457b plans are deferred compensation plans. This means that while you can generally put your contributions in an account where you can invest it, it is not legally your money until it’s distributed to you. This can have pros and cons, depending on the type of 457b plan you have, particularly in regards to asset protection, and you should understand the risks you may take on in. (Learn more below)
What are the contribution limits for 457b plans?
For a 457(b) plan, your total account contributions and additions for the year can be up to 100% of your compensation or $23,000 (as of 2024), whichever is less.
When we discuss 401(k) plans, we remind doctors that the contribution limit is the sum total across all your accounts. If you have a 403(b) plan and a 401(k) plan, for example, your total aggregate contributions across both accounts is restricted by the $23,000 limit in 2024.
A 457(b) plan, however, is treated differently.
With a 457(b), you can contribute the $23,000 maximum to your 401(k) and also contribute the $23,000 maximum to your 457(b). This can be a powerful way to double your tax-advantaged retirement savings, if you have access to both types of accounts through your employer.
Catch-up contributions and increase salary reduction limits
Some 457(b) plans also have special allowances that can increase your contribution limits as you get closer to your defined retirement age (see next section). This increased salary reduction limit is for the final three years before you attain your “normal” retirement age and is the lesser of:
2x the annual contribution limit -or-
Applicable contribution limit plus the sum of unused deferrals in prior years if you didn’t max it out
There is a distinction, however, on the “catch up” contributions at age 50 that are common with other plans like the 401(k). (See below)
What is the retirement age for a 457 plan?
The retirement age for governmental and non-governmental 457 plans is a little more complex than for 401(k)s and 403(b)s. The plan can set a “normal” retirement age no less than 65 or the age an employee can retire and receive full benefits from the plan sponsored by the employer, but also no greater than 70½.
Your plan may even allow you to elect your normal retirement age. If you leave your employer before the retirement age, you aren’t usually assessed the normal penalties for early withdrawals, but be mindful of the tax implications.
What is the 457(f) plan?
A 457(f) plan is an “ineligible” deferred compensation plan that doesn’t meet the requirements set forth to qualify for a 457(b) plan. Often, a 457(f) plan will allow for higher annual contributions above the IRS limit referenced above. While this can be advantageous for high-income earners such as physicians, there is a caveat to understand–457(f) plans don’t receive the same tax benefits as 457(b) plans.
With a 457(f) plan, you are taxed on your plan benefits as soon as you become vested in them, even if the benefits aren’t distributed to you. This can cause huge tax obligations physicians should be aware of before signing up for these types of accounts.
These 457(f) plans can get highly complicated and are generally outside the scope of what we see within the communities, so we won’t touch on them much. If you have an offer for a position and a 457(f) is included, make sure to read the plan documents carefully and ensure you understand the tax implications before signing up for this type of plan.
What is the difference between a governmental and non-governmental 457(b) plan?
This is where the majority of the questions we see within our communities come up, so we’ll spend some time here. These two plans can act very differently, and the differences can have major implications for physicians, so it’s important to dig into the details
The governmental 457(b) plan is provided to employees who work for state or local governments. If you are a federal employee, you will have a TSP (Thrift Savings Plan) instead.
These plans are generally great options for physicians to increase their tax-advantaged savings for retirement.
While the governmental 457(b) plan works similar to a 401(k) and has many of the same general features, non-governmental 457(b) plans (also referred to as tax-exempt 457(b) plans) have some key differences.
A non-governmental 457(b) plan is offered by a tax-exempt employer that isn’t a state or local government, such as a non-profit hospital system. This plan works like a bonus tax-advantaged salary deferral plan.
Roth options for 457(b) plans for governmental versus non-governmental
Governmental 457(b) plans may be amended to allow Roth contributions and in-plan rollovers to designated Roth accounts. This means that it doesn’t include a Roth option by default, but can provide the availability if structured to do it. With a Roth, you make post-tax contributions and your earnings within the account grow tax free, plus are non-taxed when distributed.
Learn more about the difference on our Roth versus traditional 401(k)s page.
Non-governmental 457(b) plans, however, cannot offer a Roth option. They are only available as pre-tax contributions.
Eligibility to 457(b) plans for governmental versus non-governmental
Eligibility to participate in non-governmental 457(b) plans is limited to select management and highly compensated employees, such as physicians. A non-governmental 457(b) is set up as an incentive to get high-income earners to save more for retirement outside of social security, which cannot usually provide adequate supplemental income to support the lifestyle of high-income earners.
Governmental 457(b) plans are available to employees or independent contractors who perform services for the employer.
457(b) plan rollovers for governmental versus non-governmental
Non-governmental 457(b) plans do not allow rollovers to other eligible retirement plans such as a governmental 457(b), a 401(k), a 403(b) or an IRA. While this isn’t a big deal while you work for your employer, it can have major implications when you leave your employment, as you may be forced to take a payout.
Governmental 457(b) plans do allow for rollovers.
Distribution options of 457(b) plans for governmental versus non-governmental
If you end up separating from employment before retirement, you may have to take the entire balance of your non-governmental 457(b) plan as a single withdrawal, depending on the plan specifics and documents. Since you cannot rollover into another qualified account, this can cause a heavy tax burden at the time of your separation.
The distribution options available for a non-governmental 457(b) plan can be a deciding factor in whether to sign up for this benefit or not. The default option on these types of plans is a lump sum distribution within 60-90 days of severance from your employer. Some non-governmental plans offer additional distribution options, which can be much more favorable and tax friendly. Once you decide on a distribution option when terminating your employment, it’s usually irreversible (though some plans offer a one-time opportunity to change your mind).
If you aren’t going to be with your employer for the long haul, a non-governmental 457 may not be the best investing option. It can also become a set of golden handcuffs chaining you to an ill-suited job contributing heavily to burnout because you don’t want to leave and deal with the tax issue.
Even with additional distribution options, it can create a heavy tax burden with mandatory distribution requirements over a given set of years, even if you are still currently employed full-time at another position.
Read your plan’s specifics carefully to understand what options are available to you.
A governmental 457(b), as stated above, can be rolled over into another eligible retirement plan.
Taxation implementations for 457(b) plans for governmental versus non-governmental
With a governmental 457(b) plan, you aren’t taxed on your plan benefits until they are distributed.
With a non-governmental 457(b) plan, you are taxed either when the benefits are distributed or when they are made available to you, whichever comes first. This is where the distribution options above and how the plan is structured become critical in your decision to take a non-governmental 457(b) plan or not.
Enrollment options for 457(b) plans for Governmental versus non-governmental
The good news is that non-governmental 457(b) plans do not allow automatic enrollment like their government counterparts, so your employer cannot enroll you automatically. You must choose to enroll yourself. Make sure you check which type of non-governmental 457 plan is offered and what the vesting and distribution requirements are.
Asset protection with a 457(b) plan for governmental versus non-governmental
Another key distinction comes in the form of asset protection. Governmental 457(b) plans are held in a trust. Non-governmental 457(b) plans aren’t. So while your deferred compensation plan protects your contributions and account balance from your creditors, your non-governmental 457(b) plan can be subject to action by your employer’s creditors. This can make a non-governmental 457(b) less safe than a governmental 457(b). As we know, so many hospital systems and employers are shutting down, going bankrupt, getting bought out, or consolidating. In each of these situations, your 457(b) plan can be at risk.
Catch up contributions for 457(b) plans for governmental versus non-governmental
Governmental 457(b) plans allow for catch up contributions once you hit 50 years old. As of 2024, the catch up contribution allows an additional $7,500 annually. This age-based catch up contribution cannot be combined with the other catch-up contribution option above. If you use this catch up contribution, you cannot use the other, so assess which offer you the higher overall contributions.
Non-governmental 457(b) plans do not allow for age-based catch up contributions.
Conclusion
Governmental 457(b) plans are similar to 401(k) plans. The key distinction is that the funds aren’t legally yours until distributed, but are held in a trust for you, which offers the same creditor protection for you as a 401(k). We recommend these plans, especially if you have the ability to do both a 401(k)/403(b) and a 457(b) plan.
Non-governmental 457(b) plans, however, are more nuanced and may not be a great fit. They have higher risk with because subject to your employer’s creditors, and can have huge tax implications if you choose to leave the job because of the limits on rollover options. Take the key differences into consideration above and review your plan documents against them before deciding to proceed with a non-governmental 457(b) plan.
Have a question we didn’t answer above? Check out our other investing resources. You can also always ask our hive mind within our physician online communities as well.