Ask Kim


Rules for 457 Retirement Plans

Kimberly Lankford

These plans for public-sector employees have even more flexibility than 401(k) plans.



I started a new job that offers a 457 retirement plan rather than a 401(k). Are the rules the same?

SEE ALSO: Are Your Saving Enough for Retirement?

The private-sector 401(k) and the 457 plan for public-sector employees have a lot in common. Both retirement-savings plans let you set aside pretax money (up to $17,500 in 2013) in mutual funds -- in other words, your contributions are deducted from taxable income -- and you don’t pay taxes until you take withdrawals in retirement. Some employers also offer Roth versions of 401(k)s or 457s, in which your contributions are not tax-deductible but the money is tax-free when withdrawn in retirement.

But there are a few key differences. The biggest one is the rule for withdrawing money after you leave your job. With a 457, you can take penalty-free withdrawals at any age. With a 401(k), if you leave a job before the year you reach age 55, they will be a 10% penalty on any withdrawals before age 59 ½. Keep your money in the 457 after you leave your job, rather than rolling it into an IRA, if you may want to access the money before age 59½. If it’s in an IRA, withdrawals before then are subject to a 10% penalty.

As with 401(k)s, 457 plans have extra catch-up contribution options. You can boost your contributions by $5,500 starting in the year you turn age 50 -- bringing your total limit to $23,000 for 2013 (see When to Start Retirement Plan Catch-Up Contributions for details). Or you can take advantage of a special catch-up contribution opportunity available just for 457s if you’re within three years of the “normal retirement age” specified in the plan documents (often the age when you can collect unreduced benefits in your pension plan, which is age 60 for many employees and in the fifties for some public-safety workers): You can double the maximum contributions (instead of making the age-50 catch-up contribution) for three years if you haven’t maxed out your contributions in the past. The extra catch-up option can be helpful if you’re getting a big payout from sick and vacation days right before retirement and would like to invest more pretax money.

Got a question? Ask Kim at askkim@kiplinger.com.



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