What is a 457 Plan?

Retirement plans are a common benefit provided by many employers to help employees plan for the future. A 457 plan is a type of retirement plan in the United States that differs from the traditional 401(k) plan and others. This retirement savings plan is utilized mostly by government organizations. It offers a variety of benefits that are comparable to those of a 401(k), but a 457 plan fails to provide certain aspects of a 401(k). The 457 plan underwent some important structural changes in 2001.

The 457 plan is most commonly associated with government agencies as an alternative to 401(k) and 403(b) savings plans. Funds are removed from an employee's paycheck before taxes are taken out, and this money is placed in a secure fund that collects interest until it is removed. Employees are allowed to contribute only a certain percentage of a paycheck to this plan, and that number differs between employers.

A 457 plan offers one distinct advantage over competing retirement distribution plans. Unlike the 401(k) and other plans, the 457 does not penalize an employee who removes the money before age 59-and-a-half. This is a major savings because, in most cases, this penalty is more than 10 percent of the net value of the savings plan. This allows employees to build a security fund that can be accessed whenever a financial emergency arises.

The 457 plan offers employees that nice advantage, but it also falls short of competing retirement plans in many categories. The biggest difference is that employers do not contribute money to this plan, as an employer might with a 401(k), so the money in the account is provided entirely by the employee. Like all other retirement plans, the 457 also is subject to taxes when funds are removed from the account. Also, employees with a 457 plan cannot make designated Roth contributions the way other retirement plans allow.

In 2001, the 457 plan underwent some significant retooling to help employees better save for the future. Where previous laws restricted the amount of contributions to a 457 and another plan, such as a 401(k), the Economic Growth and Tax Relief Reconciliation Act of 2001 allowed for greater contributions. For example, under the previous laws, an employee was allowed to contribute 10 percent to either the 457 or 401(k) or a combination of 10 percent to both. Under the 2001 law change, employees could contribute up to 10 percent to both a 457 and another plan, increasing the amount of money that could be saved for retirement.