If your university benefits packet mentions a 457(b) plan, you may have wondered what it is and whether it deserves a place in your savings strategy. A 457(b) plan is a type of deferred compensation plan offered by state and local governments and certain tax-exempt organizations, which can include public and some private universities.
For many professors, researchers, and staff, the 457(b) sits quietly next to a 403(b) and goes unused. This article explains how a 457(b) plan works, what makes it different from other retirement accounts, and the questions worth asking before you enroll.
What Is a 457(b) Plan?
A 457(b) plan lets eligible employees set aside part of their pay for retirement. Depending on the plan, contributions may be made on a pre-tax basis, a Roth basis, or both.
Pre-tax and Roth contributions
Pre-tax contributions: Money goes in before income tax, which may lower your taxable income today. Withdrawals are generally taxed as ordinary income later.
Roth contributions: Money goes in after tax. Qualified withdrawals, including earnings, may be tax-free if certain conditions are met.
Plan availability: Not every 457(b) offers a Roth option. Your plan documents will say what is available.
Contribution limits
The IRS sets annual contribution limits for 457(b) plans and adjusts them periodically. Because limits change, it is best to check current IRS guidance or your plan administrator rather than relying on a number you saw in a past year.
Governmental vs. Non-Governmental 457(b) Plans
This is one of the most important details for university employees, and it is often overlooked.
Governmental 457(b) plans
Public universities and other state or local government employers may offer a governmental 457(b). In these plans, assets are generally held in trust for participants. Governmental plans may also allow rollovers to and from other eligible retirement plans and IRAs.
Non-governmental 457(b) plans
Some private, tax-exempt institutions offer a non-governmental 457(b), often to a select group of higher-paid employees. These plans can work differently:
Ownership of assets: Assets may remain the property of the employer until paid out and can be subject to the employer's general creditors.
Rollover limits: Rollover options to IRAs or other plan types are generally more limited.
Distribution elections: You may need to choose your payout timing and method in advance, and changing it later can be restricted.
If you are not sure which type your institution offers, ask your benefits office directly. The answer can change how you think about the plan.
457(b) Withdrawal Rules
One feature that sets the governmental 457(b) apart is how withdrawals work after you leave your job.
Leaving your employer
With many retirement plans, withdrawals before age 59 1/2 may be subject to an additional 10% tax unless an exception applies. Distributions from a governmental 457(b) after you separate from service are generally not subject to that additional 10% tax, regardless of age. Ordinary income tax still applies to pre-tax money. Amounts rolled into the 457(b) from other plan types may follow different rules.
Why this matters for academics
This flexibility can be meaningful for someone who plans to leave a full-time university role before 59 1/2 to consult, write, or start a new venture. A 457(b) may help bridge the years before other accounts become easier to access.
Required minimum distributions
Like other tax-deferred retirement plans, 457(b) plans are subject to required minimum distribution rules starting at a certain age. These ages have changed in recent years, so check current IRS guidance.
457(b) Catch-Up Contributions
457(b) plans may offer catch-up options that can help people closer to retirement save more.
Age-based catch-up: Governmental 457(b) plans may allow additional contributions once you reach age 50.
Special 457(b) catch-up: Some plans allow a special catch-up in the three years before the plan's normal retirement age, based on contributions you did not make in earlier years.
Not both at once: In governmental plans, you generally cannot use both catch-ups in the same year. Typically the larger one applies.
Catch-up rules are detailed and can change, so it is worth reviewing them with your plan administrator or advisor before you make an election.
How a 457(b) Fits With Your Other University Benefits
Many university employees have access to a 403(b) and a 457(b) at the same time. In many cases the two plans have separate contribution limits, which can allow someone to save more in total than one plan alone would allow.
Questions to ask before enrolling
Is my 457(b) governmental or non-governmental?
Does the plan offer pre-tax, Roth, or both?
What investment options are available, and what do they cost?
Does my employer contribute anything to this plan?
How would I take money out if I left the university?
For a broader look at university benefits, see Your University Benefits Package Is More Valuable Than You May Think.
Coordinating with investments
Choosing a plan is only part of the decision. How the money is invested, and how it fits with your other accounts, also matters. Summit Retirement Advisors' Asset Management Overview covers areas such as asset allocation, risk analysis, and diversification. Diversification does not guarantee a profit or protect against loss.
How Summit Retirement Advisors Approaches Retirement Plan Decisions
Summit Retirement Advisors lists employer benefits optimization among its planning services, including a review of benefit options, retirement plan account options, and health programs. The goal is to understand how each choice fits your overall plan. You can read more on the Financial Planning Overview page.
The firm is located at 310 Ferry Street, Lafayette, IN 47901, and works with "research-driven professionals, scientists, professors, founders, and university leaders" who want clarity without sacrificing their time. Its approach centers on listening first, translating complexity into clarity, collaborative refinement, protecting your time, and long-term planning.
Get Help Reviewing Your Plan Options
If you are unsure how a 457(b) plan fits with your other university benefits, a conversation may help. Book an appointment or call 765-447-1330. You can also sign up to receive the firm's newsletter on the contact page.
Frequently Asked Questions
What is a 457b plan and how does it work?
A 457(b) is a deferred compensation retirement plan offered by government employers and certain tax-exempt organizations. You contribute part of your pay, on a pre-tax or Roth basis if available, and the money can grow until you withdraw it.
Can I withdraw from my 457b without penalty?
For governmental 457(b) plans, distributions after you leave your employer are generally not subject to the additional 10% early withdrawal tax. Income tax still applies to pre-tax money. Rules differ for non-governmental plans and for money rolled in from other plans.
Can I contribute to a 457b and 403b at the same time?
Many employees can. The two plans often have separate contribution limits. Check current IRS guidance and your plan documents for the details that apply to you.
Can I roll over a 457b to an IRA?
Governmental 457(b) plans generally allow rollovers to IRAs and other eligible plans. Non-governmental 457(b) plans typically have much more limited options. Keep in mind that rolling a governmental 457(b) into an IRA may change how early withdrawals are treated.
Is a 457b plan a good idea for professors?
It depends on your goals, income, other savings, and whether your plan is governmental or non-governmental. Reviewing the plan details with an advisor can help you decide.
What happens to my 457b if I leave my university?
Options may include leaving the money in the plan, rolling it over, or taking distributions. The choices available depend on your plan type and its rules.
Securities offered through Regulus Financial Group, LLC, Member FINRA/SIPC. Advisory services offered through Regal Investment Advisors, LLC, an SEC Registered Investment Advisor. Regal Investment Advisors and Regulus Financial Group are affiliated subsidiaries of Regal Holdings of America, LLC. Insurance products are offered through Summit Financial Group of Indiana. Summit Retirement Advisors and Summit Financial Group of Indiana are affiliated but independent of the Regal entities. This article is for general educational and informational purposes only and is not tax, legal, or investment advice, nor a solicitation to buy or sell any security. Information is from sources believed to be accurate but is not guaranteed. Investing involves risk, including the possible loss of principal. Diversification and asset allocation do not guarantee a profit or protect against loss. Past performance is no guarantee of future results. Please consult with a qualified professional regarding your individual situation.
