401(k) vs. 457 Plans: Which One is Right for You?
Retirement Plan Options | by Jules Buxbaum | Wednesday, January 01, 2025
401(k) vs 457 plan decisions can feel confusing if you’re aiming to balance taxes, growth, and flexibility. If you work in the private sector or for a government body, it’s vital to compare each plan’s rules so you can choose the path to a strong retirement foundation.
Many professionals, from first-time savers to seasoned employees, often wonder about employer contributions and plan fees. To learn more about ways to maximize employer matching contributions in either plan, check out our guide on maximizing employer (k) matching contributions.
Key Differences in Eligibility and Participation
401(k) plans are commonly offered by private sector companies. They fall under federal rules set by the IRS and the Department of Labor, giving employees a pre-tax vehicle for retirement savings.
By contrast, 457 plans are typically available to state and local government workers or certain non-profit employees. According to NYC.gov, about 5.5 million public employees used 457 plans in 2020.
Many workers don’t realize they might qualify for both a 401(k) and a 457. If you’re employed in a public job that also has private affiliations, you could boost your savings potential by contributing to each plan within IRS guidelines.
Contribution Limits and Catch-Up Options
Both plans share similar annual contribution caps. For 2024, under-50 participants can set aside $23,000 in their chosen plan, while those 50 or older can add up to $7,500 more.
457 plans offer a special twist: in the three years leading up to your “normal” retirement age, you can contribute up to twice the annual limit. This can mean a significant boost if you’re short on retirement funds. For a deeper look at RMDs (Required Minimum Distributions) that eventually apply to both plans, see our overview of RMD rules.
Some employees reach their 50s and realize they’re behind on savings. The double catch-up provision is one reason 457 plans stand out by making it simpler to funnel extra funds near the end of one’s career.
Early Withdrawals and Penalties
A major difference lies in how each plan handles early distributions. 401(k) participants who withdraw funds before age 59½ typically encounter a 10% penalty unless a specific exception applies.
457 plans do not invoke that standard penalty for pre-59½ withdrawals. However, you’ll still pay ordinary income taxes on any amounts pulled out. This distinction often appeals to those wanting earlier access to their nest egg or those facing unexpected job changes.
If you find yourself behind on contributions and worry about dipping into retirement accounts too soon, you might explore improving your retirement readiness. This can reduce the temptation of costly or untimely withdrawals later.
Employer Matching, Vesting, and Fees
Employers frequently offer a match in 401(k) plans, although the vesting schedule can vary. Some matches vest right away, while others may take several years.
In 457 plans, matching is less typical but has been on the rise. When 457 matches do occur, they often vest immediately. Most states negotiate plan costs carefully, so 457 fees can be lower than many 401(k) programs. Even a fraction of a percentage point can meaningfully influence your final balance.
For your investment strategy, it’s also vital to diversify your assets. If you’re curious how to spread your money across stocks, bonds, and more, check out our resource on how to diversify your portfolio effectively.
How 2Pi Financial Sees Risk in Retirement
At 2Pi Financial, we believe many individuals don’t take enough market risk in their retirement portfolios. While a low-risk setup can benefit those with very high net worth, most people need equities to pursue a solid retirement.
Historically, equity returns have exceeded other asset classes for decades. This outperformance suggests to us that there’s no fundamental indicator expecting it to vanish.
A major misconception is that every investor’s stock allocation should shrink by default with age. We argue it’s not age on its own that should drive risk changes, but rather your overall wealth, future income stream, and personal financial situation.
For instance, someone at 60 with substantial future earnings might still tolerate more stock exposure than a 30-year-old who already reached their wealth goals. That’s why we rarely recommend generic “glide path” allocations that automate reduced equity levels solely based on a birthdate.
Which Plan Is Right for You?
A 401(k) might be best for those expecting a robust employer match, especially when the plan offers a broad roster of funds. If you see yourself in a high turnover industry, you’ll want to watch the vesting schedule to confirm you won’t lose those matched dollars.
On the other hand, a 457 plan is often useful if you want early access to savings without the 10% penalty. The double-limit catch-up in the three years before retirement is also a major draw. Do note that 457 matches count toward the same annual limit as your contributions.
If you’re still stuck between the two, we invite you to explore how the 2Pi Financial Planning Engine can forecast potential outcomes. Our engine (available at 2Pi Financial Planner) shows you how changing your retirement age, savings rate, and portfolio risk shifts your probability of maintaining income over time.
The tool adjusts for inflation and reveals how tweaking key factors, like your stock exposure, influences the odds of long-term success. We find that personalized analysis matters more than following any one-size-fits-all rule about which plan or fund is “safer” or “wiser.”
Bottom Line
Setting up a retirement plan is about aligning your personal goals with the best tax advantages and risk profile. Each of these account types—401(k) or 457—has strengths, especially when you look at early withdrawal differences and catch-up provisions.
If you have a solid framework for risk, your plan choice can be even more powerful. For more details on shaping an effective drawdown strategy, see our guide on planning your withdrawals for maximum security.
401(k)s tend to shine when employer matching is generous or if you prefer a bigger roster of potential investments. 457 plans can help public sector employees ramp up savings later in life and tap funds without a 10% penalty if needed.
Ultimately, both plans can serve you well if used with a long-term vision. Keep your risk allocation grounded in your earnings profile, and don’t overlook the power of equities to support growth.
References
1. NYC.gov. (2020). “457 vs. 401(k) Comparison.” Available at: https://www.nyc.gov/assets/olr/downloads/pdf/deferred/457-401k-comparison.pdf
2. Investopedia. (2020). “What Is the Difference Between a 401(k) Plan and a 457 Plan?” Available at: https://www.investopedia.com/ask/answers/100314/what-difference-between-401k-plan-and-457-plan.asp
3. SoFi.com. (2021). “457 vs 401(k) Retirement Plan: Similarities and Differences.” Available at: https://www.sofi.com/learn/content/457-vs-401k/
