Two types of Internal Revenue Service (IRS)-sanctioned, tax-advantaged employee retirement savings plans are the 401(k) plan and the 457 plan.
These retirement savings accounts were each designed to serve as one leg of the famous three-legged stool of retirement: workplace pension, Social Security, and personal retirement savings. As employers have transitioned away from workplace pensions, however, personal retirement savings have increasingly come to serve as most people’s primary retirement plan, along with Social Security. (This can be a 401(k) or a 457, but it doesn't have to be.)
They share similar features. Like 401(k)s, 457 plans are funded via employee payroll deductions. A participant sets aside a percentage of their pretax salary to put into their retirement account. This money compounds without being taxed until it is withdrawn, typically in retirement.
That's the traditional way—but now, many plans also offer a Roth option. With a Roth account, the contributions are taxed upfront, and—as long as the account has been open for at least five years and the participant is at least 59 ½—any subsequent growth and withdrawals are not taxed.
Both plans also allow for early withdrawals in limited circ*mstances. (However, the qualifying circ*mstances for early withdrawal eligibility may be different.) And contributions to both plans qualify employees for a “saver’s tax credit." It is also possible to take loans from both 401(k) and 457 plans.
Though 401(k) plans and 457 plans operate similarly, there are differences, including who is allowed to participate in each one.
Key Takeaways
- 401(k) plans and 457 plans are tax-advantaged retirement savings plans.
- 401(k) plans are offered by private employers, while 457 plans are offered by state and local governments and some nonprofits.
- The two plans are very similar, but because 457 plans are not governed by ERISA, some aspects, such as catch-up contributions, early withdrawals, and hardship distributions, are handled differently.
401(k) Plans
401(k) plans are offered by private, for-profit employers and some nonprofit employers. They are the most common type of defined-contribution retirement plans. Notably, 401(k) plans are considered qualified retirement plans and are therefore subject to the Employee Retirement Income Security Act (ERISA) of 1974.
Employers sponsoring 401(k) plans may make matching or nonelective contributions to the plan on behalf of eligible employees. Earnings in a 401(k) plan accrue on a tax-deferred basis. At the same time, 401(k) plans offer a menu of investment options that are prescreened by the sponsor, and participants choose how to invest their money.
The plans have an annual maximum contribution limit of $23,000 for 2024 ($22,500 for 2023). For employees age 50 or older, the plans contain a catch-up provision that allows you to contribute an additional $7,500 for 2023 and 2024.
Withdrawals from a 401(k) taken before age 59½ result in a 10% early withdrawal tax penalty. However, plan participants can make early withdrawals without a penalty from a 401(k) under financial hardship, which is defined by the plan.
Contribution limits for all plans are increased every year to account for inflation.
457 Plans
457(b) plans are IRS-sanctioned, tax-advantaged employee retirement plans offered by state and local public employers and some nonprofit employers. They are some of the least common defined-contribution retirement plans.
The annual maximum contribution limit for 457 plans is $23,000 for 2024 ($22,500 for 2023). For employees over the age of 50, the plans contain a catch-up provision that allows up to $7,500 in additional contributions for 2023 and 2024.
However, 457 plans are a type of nonqualified retirement plan: they are not governed by ERISA. As such, the Internal Revenue Service (IRS) does not assess an early withdrawal penalty for 457 plan participants who take money out before age 59½, though the amount taken is still subject to normal income taxes.
Notably, 457 plans feature a double-limit catch-up provision that 401(k) plans do not have. This provision is designed to allow participants who are nearing retirement to compensate for years in which they did not contribute to the plan but were eligible to do so. This provision allows an employee to contribute up to $45,000 to a plan for 2023. For 2024, it is up to $46,000.
With 457 accounts, hardship distributions are allowed after an “unforeseeable emergency,” which must be specifically laid out in the plan’s language.
Both public government 457 plans and nonprofit 457 plans allow independent contractors to participate.
Special Considerations
It is possible to contribute to both a 401(k) and a 457 plan at the same time. Many large government employers offer both plans. In such cases, the joint participant can contribute the maximum amounts to both.
What Is the Contribution Limit for a 401(k) Plan?
The contribution limit for a 401(k) plan is $22,500 in 2023 and $23,000 in 2024. For both tax years, those age 50 or older can contribute an additional $7,500.
Can I Contribute to Both a 401(k) and an IRA?
Yes, you can contribute to both a 401(k) and an Individual Retirement Account (IRA)—either a traditional IRA or a Roth IRA. IRAs and 401(k)s are different types of plans. You can only contribute to a 401(k) if your employer offers one. Anyone can contribute to an IRA. Just ensure you abide by the contribution limits.
How Do You Open an IRA?
Most banks and brokerage companies offer IRAs. You can simply inquire at your bank or brokerage or open up one online at most financial institutions.
The Bottom Line
The 401(k) and the 457 are retirement plans offered by employers to their employees to save for retirement. They are similar in almost every way with a few distinctions, the primary one being that 401(k)s are offered by private employers while 457 plans are offered by local governments and some non-profits. If you have a question about what's on offer, check with your employer or plan administrator.
