State and local government employees can invest more in their 457 plans in 2024 than in 2023. Like the better-known 401(k) plan in the private sector, the 457 plan (sometimes called a "457(b) plan") allows employees to deposit a portion of their pre-tax earnings in an investment account. The 457 is also a tax-advantaged account; employees postpone paying taxes on the money invested in the 457 until the funds are withdrawn after they retire. As such, these plans can help government workers with their retirement planning.
Unlike most other retirement accounts, there are two types of these “catch-up” contributions for 457 plans: the age 50+ catch-up provision and the pre-retirement 3-year catch-up provision.
457 plan contribution and catch-up limits for 2024
The maximum amount you can contribute to a 457 retirement plan in 2024 is $23,000, including any employer contributions. That’s an increase of $500 over 2023. For example, if your employer contributes $5,000, you can contribute up to $18,000 to meet the annual limit. (Most plans, however, don't match worker contributions.)
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The age 50+ catch-up provision. If you're 50 or older, your plan may allow you to contribute an additional $7,500 as a "catch-up" contribution, bringing your total allowable contribution to $30,500. To take advantage of the Age 50+ catch-up, you could contribute up to $1,173 per biweekly paycheck to reach the $30,500 limit for 2024.
The pre-retirement 3-year catch-up provision. There's also a separate catch-up contribution that benefits soon-to-be retirees, if permitted by the 457 plan. If you're within three years of the plan's "normal retirement age," you can save double the annual limit for three years as long as you haven't maxed out your contributions in the past. If you're eligible, that brings your maximum contribution level to $46,000 for 2024 — or up to $138,000 over three years.
If you are eligible and wish to use the full Special 457(b) catch-up provision, you could contribute up to 1,769 per biweekly paycheck to reach the $46,000 contribution limit for 2024.
No double-dipping. However, if you are eligible for both the 50-plus and 3-year catch-up contributions, the IRS will only allow you to take advantage of the one that adds the most to your retirement account. You can’t do both.
Benefits of a 457 retirement plan
As with contributions to a traditional 401(k) or contributions to a 403(b), money goes into a 457 before you pay income taxes on it. The pretax contributions lower your current taxable income. Meanwhile, your contributions and earnings grow tax-sheltered until you withdraw them. Unlike many other retirement accounts, the IRS doesn't penalize you for taking early withdrawals from a 457 account before age 59 1/2. But you will pay regular income tax on all withdrawals.
Some 401(k) plans in the private sector automatically enroll workers. But 457 plans generally do not permit auto-enrollment because of state or local laws. So the first step in benefiting from this retirement vehicle is to sign up.
Best investments for a 457 plan
Then, do your due diligence on your investment options. Fees and other costs are always important when evaluating investments.
More 457 plans are adding target-date mutual funds that take a lot of the investment decision-making out of workers' hands. With target-date funds, a worker chooses the fund whose name includes the year closest to his or her expected retirement date. In 2024, a worker planning to retire in about 20 years would select a target-date fund with a year close to 2044 in its name. (Target-date funds typically are named in five-year increments: 2035, 2040, 2045 and so on.) These funds invest aggressively when workers are young and gradually become more conservative as retirement approaches.
For example, a target-date fund meant for workers in their twenties holds mostly stocks. But investments in a target-date fund for someone nearing retirement age may be split evenly between stocks and bonds.
Besides target-date funds, 457 plans generally offer a lineup of index funds, actively managed stock mutual funds and fixed-income funds. They also offer managed accounts, which are professionally managed to match your financial goals and risk tolerance.
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