What Is a 457(b) Plan? A Retirement Planning Guide for Public-Sector Employees
If you work in the public sector, chances are you've heard of a 457(b) retirement plan. Maybe it's offered through your employer or shows up alongside your pension and other retirement accounts.
What many employees don't realize is that a 457(b) can offer features that differ from other workplace retirement plans, including unique withdrawal rules and, in some cases, the ability to save alongside a 403(b).
Retirement planning for public-sector employees often involves more moving parts than simply contributing to a workplace retirement account. Pensions, Social Security, and personal savings can all play a role, making it important to understand where a 457(b) fits into the bigger picture.
Whether you're just getting started in your career or looking ahead to retirement, understanding how a 457(b) plan works can help you make more informed decisions about your financial future.
What Is a 457(b) Plan?
A 457(b) plan is a tax-advantaged retirement savings account offered primarily to state and local government employees. In Maryland, many state employees access a 457(b) plan through the Maryland Supplemental Retirement Plans (MSRP) program, though 457(b) plans are also commonly offered by counties, municipalities, school systems, and other public-sector employers.
Similar to a 401(k), contributions are typically made directly from your paycheck, allowing you to save for retirement while potentially reducing your current taxable income. The money in your account grows tax-deferred until you withdraw it, helping your investments compound over time.
Many eligible employees also participate in a pension plan as part of their retirement benefits. A 457(b) plan can serve as an additional source of retirement savings, helping bridge the gap between pension income and the retirement lifestyle you envision.
How Does a 457(b) Plan Work?
When you enroll in a 457(b) plan, you choose how much of your paycheck you want to contribute. Those contributions are then invested according to the options available within your employer's plan.
Depending on your plan, you may have access to:
Traditional pre-tax contributions and Roth after-tax contributions
Mutual funds, target-date funds, and other investment options selected by your plan administrator
Traditional contributions reduce your taxable income today, while Roth contributions are made with after-tax dollars and can provide tax-free withdrawals in retirement if certain requirements are met. Over time, your contributions and investment earnings can accumulate and help support your retirement goals.
Who Can Participate in a 457(b) Plan?
457(b) plans are commonly available to:
State government employees
County and municipal employees
Public safety professionals
Teachers and school employees
Public university employees
Certain employees of tax-exempt organizations may also have access to 457(b) plans, depending on their employer
For many of these employees, a 457(b) plan complements other retirement benefits, including pensions and Social Security. Unlike federal employees, whose primary workplace retirement savings vehicle is typically the Thrift Savings Plan (TSP), many state and local government employees use a 457(b) as part of their retirement strategy.
How Is a 457(b) Different From a 401(k)?
| Feature | 457(b) Plan | 401(k) Plan |
|---|---|---|
| Who typically offers it? | State and local governments, public agencies, and certain nonprofit organizations | Private-sector employers |
| Who can participate? | Government employees and eligible nonprofit employees | Employees of participating private-sector companies |
| Tax treatment | Traditional pre-tax and, in some plans, Roth contributions | Traditional pre-tax and Roth contributions may be available |
| Contribution limits | Annual limits are generally similar to 401(k) plans and may include special catch-up provisions | Annual limits set by the IRS, with age-based catch-up contributions available |
| Early withdrawal rules | Generally allows penalty-free withdrawals after separation from service, regardless of age (taxes may still apply) | Withdrawals before age 59½ may be subject to a 10% early withdrawal penalty unless an exception applies |
| Employer matching | Less common, but may be available depending on the employer | Often offered by employers |
| Best known advantage | Greater flexibility for employees who retire or leave public service before age 59½ | Employer matching contributions can significantly boost retirement savings |
For many public-sector employees, the biggest distinction is withdrawal flexibility.
Unlike a traditional 401(k), a governmental 457(b) plan generally allows you to access your retirement savings after leaving your employer without the additional 10% early withdrawal penalty, even if you are under the age of 59½. Ordinary income taxes may still apply.
This feature can make a 457(b) especially valuable for employees considering an earlier retirement or career transition.
Can You Contribute to Both a 457(b) and a 403(b)?
Some teachers, school employees, healthcare workers, and public university employees may have access to both a 457(b) plan and a 403(b) plan through their employer.
One of the most valuable features of a 457(b) is that it has a separate IRS contribution limit from a 403(b). This means eligible employees may be able to contribute the maximum amount to both plans in the same year, potentially increasing their tax-advantaged retirement savings.
457(b) Contribution Limits and Catch-Up Contributions
The IRS adjusts 457(b) contribution limits periodically, which can create opportunities to increase your retirement savings over time.
For 2026, employees can contribute up to $24,500 to a 457(b) plan. If you're age 50 or older, you may be eligible to make an additional $8,000 catch-up contribution, bringing your total annual contribution limit to $32,500.
Under SECURE 2.0, employees ages 60 through 63 may qualify for an enhanced catch-up contribution of $11,250, allowing total contributions of up to $35,750 in 2026 if their plan offers this provision.
Some governmental 457(b) plans may also offer a special catch-up provision during the three years before normal retirement age. Unlike the standard age-based catch-up contribution, this provision may allow eligible employees to contribute substantially more than the annual limit, depending on prior contribution history and plan rules.
Key Pros and Cons of a 457(b) Plan
Like any retirement account, a 457(b) plan has advantages and trade-offs.
Potential Benefits
Tax-advantaged retirement savings
Payroll deduction convenience
Potential Roth contribution options
Ability to supplement pension income
No 10% early withdrawal penalty after separation from service in many governmental plans
Catch-up contribution opportunities
Ability for some employees to contribute to both a 457(b) and 403(b)
Potential Considerations
Investment options are limited to those offered within the plan
Withdrawals from traditional accounts are generally taxable
Plan features vary by employer
Retirement planning decisions should consider your entire financial picture, not just one account
How a 457(b) Fits Into Your Retirement Strategy
A 457(b) plan can be an excellent retirement savings tool, but it works best when viewed as part of a larger financial strategy.
For many public-sector employees, retirement income may come from several different sources, including:
Pension benefits
Social Security
457(b) savings
IRAs
Taxable investment accounts
A spouse's retirement plan
At The Kelly Group, we work with many public-sector employees throughout Harford County and the entire state of Maryland, including educators, school employees, healthcare professionals, and local government workers. We frequently help employees of organizations such as Harford County Public Schools and regional healthcare organizations understand how their pensions, 457(b) plans, Social Security benefits, and other retirement resources work together within a broader financial plan.
Our goal is to help you build a retirement income strategy that supports your long-term goals and provides confidence in the decisions you're making today.
Making the Most of Your Retirement Benefits
Learning how a 457(b) plan works is an important first step, but knowing how it fits into your broader financial plan is where the real value lies.
Whether you're just getting started, approaching retirement, or evaluating your withdrawal options, taking a thoughtful approach to retirement planning can help you make the most of the benefits you've earned throughout your career.
Connect with our Bel Air, Maryland, advisors to learn how your 457(b), pension benefits, Social Security, and other retirement assets can work together as part of a comprehensive retirement strategy.
The Kelly Group is a trade name of Kelly Financial Group, LLC, a registered investment adviser with the Securities and Exchange Commission (“SEC”). Registration with the SEC does not imply any level of skill or training. For more information about our services, please see our Brochure and Relationship Summary, available on the SEC’s website at www.adviserinfo.sec.gov, and on The Kelly Group’s website at www.kellyria.com.