401(k) vs. 457(b): tax-deferred retirement plans available to private-sector employees and government workers

• 401(k) and 457(b) plans are similarly structured tax-advantaged retirement savings plans. 
• 401(k) plans are sponsored by private employers, while 457(b) plans are offered by governments and some nonprofits.
• Contribution limits and the rules for withdrawals are also key differences between the two types of accounts.
• Read more stories from Personal Finance Insider.

The 401(k) and a 457(b) are two types of plans you may have come across when looking into your retirement options. As tax-deferred retirement accounts, 401(k) and 457(b) plans share a lot of similarities. But there are also some key differences, including who can participate and when you can take money out of them without penalties.  

401(k) vs. 457(b): At a glance

Contributions to a 401(k) and 457(b) are made in pre-tax dollars, and earnings grow tax free until taken as distributions in retirement. One of the main differences between them is who has access to each type. Private employers sponsor 401(k) plans for their workers, while state and local governments offer 457(b) plans to public employees. Certain nonprofits may also offer 457(b) plans.

For their part, 401(k) plans are set up for employees as a primary source of retirement income. On the other hand, 457(b) plans are typically used as a supplement to government workers’ pension plans. Participants in a 457(b) plan also aren’t subject to the same tax penalty for withdrawing money before age 59½, although they have lower total contribution limits.

What is a 401(k)?

A 401(k) is a retirement-savings plan sponsored by an employer. Both employer and employee can contribute to the plan. Employee contributions reduce taxable income, and earnings grow tax free until they’re taken out after retirement. 

How do contributions work in a 401(k)?

A common feature of 401(k) plans is an employer-sponsored match where a company will contribute money to the account based on how much the employee puts in. Employers often offer to match a certain amount of an employee’s contributions, usually as a percentage of their salary.

The 2022 employee contribution limit for a 401(k) is the lesser of 100% of the employee’s salary or $20,500. Plan participants age 50 or older can contribute an additional $6,500. The maximum allowable contribution including the employer’s match is $61,000.

What is vesting in a 401(k) plan?

One thing to be aware of with employer contributions is the vesting schedule. Vesting is how much of an employer’s contributions become nonforfeitable to the employee over a period of time. In other words, an employee may not actually have ownership of the money contributed by the employer into the 401(k) account until they’ve worked at the company for a specified period of time.

Pros	Cons
Earnings grow tax free until distribution. Contributions are made pre-tax. Loans against 401(k)s are allowed. Employer matching contributions are common. Contributions reduce current taxable income.	A tax penalty of 10% for early distributions (before age 59½) is charged. There can be limited investment options. Fees can be high. Individuals need to make investment decisions by themselves, with little guidance from the plan provider. Employer matches may take a long time to vest.

What is a 457(b)?

A 457(b) is a retirement account that allows government employees to contribute pre-tax dollars that grow tax free until they’re withdrawn after retirement. It is much like a 401(k) for private-sector employees, with a few key differences. 

The Internal Revenue Service only allows state or local governments or tax-exempt organizations to establish 457(b) retirement accounts. And government employers can’t sponsor new 401(k) plans. 

“Public employers cannot legally sponsor a 401(k) plan for their employees — unless the plan was grandfathered under the Tax Reform Act of 1986 which prohibited the establishment of new 401(k)s for governmental employers after May 6, 1986,” explains Wendy Carter, vice president and defined contribution practice director at the benefits and HR consulting firm The Segal Company.

How is a 457(b) different from a 401(k)?

“One of the most striking differences between 401(k) and 457(b) plans is that there is no 10% early withdrawal penalty in 457(b) plans,” says Carter. “They are intended to be supplemental savings plans for government workers that also have a pension, including public safety workers like police officers and firefighters, who tend to retire earlier than private-sector workers.”

457(b) plans are not technically retirement plans. They’re called savings plans and aren’t subject to the same regulations as retirement plans are. Both employers and employees can contribute to 457(b) accounts, though neither is required to do so. 

What are the contribution limits for a 457(b)?

Contribution limits for a 457(b) account are the lesser of 100% of an employee’s salary or the elective deferral limit of $20,500 for 2022. This is the maximum combined total for both employee and employer contributions. 

The maximum deferral limit is also counted separately from other retirement accounts, meaning, you could contribute $20,500 for both a 401(k) and a 457(b) if those options were both available to you (though this is rare).

Catch-up contributions are also similar to the 401(k), though there is one key difference. As with the 401(k), employees over the age of 50 can contribute an additional $6,500 in catch-up deferrals for a maximum employee contribution limit of $27,000. On the other hand, 457(b) accounts allow a participant to essentially double their contributions in the three years leading up to the retirement age specified by the plan. 

“Under this provision, an employee who has not contributed to the maximum contribution limit in past years can contribute additional contributions up to twice the normal limit on annual contributions when they are near retirement,” says Carter. 

What this means is an employee with a 457(b) plan can contribute as much as $41,000 in a year, assuming there were prior years where the employee did not reach the contribution limits. The IRS does not allow for an additional $6,500 catch-up amount on top of this. Employees must choose the double allowable amount ($41,000) or the $6,500 catch-up amount ($27,000). 

How does vesting work in a 457(b) plan?

Employer contributions may also be subject to a vesting schedule, which is a bit more complicated for a 457(b) plan. It’s possible the plan document may not have a vesting schedule. This is because many 457(b) plans are silent on vesting when the deferral amount is immediately vested. 

Employers that utilize vesting schedules for 457(b) plan participants can run into issues. Vesting schedules can be problematic as they may create taxable income to the participant in the year when the amount is fully vested.

Pros	Cons
Assets grow tax free. Contributions are pre-tax. There’s no penalty for early withdrawals. You can borrow against the account. Catch-up contributions are allowed after employees reach age 50.	Only certain government employees are allowed to participate. Employers might not contribute much, if at all, to a 457(b) plan. Employees may not be aware of the 457(b) as an option if the primary retirement vehicle is a pension. If 457(b) funds are rolled over to an IRA, they will then incur tax penalties for early distributions.

401(k) and 457(b) savings plans are both excellent tax-advantaged ways to save for retirement. Either can be a good option. Depending on which is available to you, weigh the pros and cons of participating. If you’re not sure or just need guidance, talk to a financial advisor or certified financial planner, who can provide personalized advice tailored to meet your circumstances and goals.