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Retired Military Finances 201: 457 Plans. Not Like the Others. Thumbnail

Retired Military Finances 201: 457 Plans. Not Like the Others.

Investment Retirement Funding

Remember that song One of These Things is not Like the Others from when your kids were little? The same thing applies to the major employer sponsored retirement plans...the 401(k), 403(b), TSP and 457 plans. The 457 plan is a lot like the others, but it's not exactly like the others.

What is a 457 Plan?

A 457 plan is a retirement plan for state and local governments and tax-exempt organizations. And much like the other plans it allows you to contribute funds towards your retirement on either a tax deferred or tax free (Roth) basis. But one of the best ways to start to understand a 457 plan is to look at its other name. 457 plans are also called Deferred Compensation Plans and function in many ways like Deferred Compensation Plans offered by businesses.

How does a 457 Plan Work?

Much like with a 401(k), employees are allowed to defer compensation and instead "deposit" the funds into the 457 plan. I used "deposit" due to what actually happens. In the case of a 457 sponsored by a governmental entity, the deferred salary is deposited into a trust account, just like a 401(k). On the other hand, funds deferred via a 457 sponsored by a tax-exempt entity are not deposited into a trust account. In this case the deferred salary is entered into the books of the employer as a liability to be paid in the future. The employee actually becomes a lender to the tax-exempt entity and the contributions could be lost if the tax-exempt entity can't pay its bills when it's time to pay out the 457 plan funds. This is very similar to a business sector Deferred Compensation Plan.

How is a 457 Plan Similar to the Other Plans?

457 plans have the same annual contribution limits as the other employer sponsored plans. For 2025, that amount will be $23,500. The basic catch-up contributions are the same for all plans ($7,500 in 205). 457 plans also can allow the Extra-Mega-Special-Bonus Catch-up Contribution for those who are age 60 - 63.

Participants may also pick the investments purchased on their behalf in a 457 plan.

But at that point, 457 plans become pretty different from the others.

How is a 457 Plan Different from the Other Plans?

Since a 457 isn't technically a retirement plan, separated employees can take penalty-free distributions from the plan prior to age 59 1/2 (they're still subject to taxation though).

457 plans also have another special catch-up. During the last 3 years before the plan's normal retirement age, plan participants can contribute up to double the annual limit ($23,500 for 2025), if the participant didn't max out contributions in prior years. The formula to figure out the amount is a little complicated and the plan administrator will likely tell you how much you can contribute under this rule, but it basically is the current year's limit plus any gap between the annual limit and what was actually contributed in earlier years. Again, it is limited to twice the current limit.

What Else Should I Know About 457 Plans?

Probably the other big thing to know is that 457 plans have no effect on your 403(b) or 401(k) contributions. That means that if your employer offers both a 403(b) and a 457 plan you could contribute $47,000 this year ($23,500 x 2). The 457 plan doesn't affect how much your employer can contribute to your 401(k) or 403(b) either. Same applies if you have a side hustle and your full-time employer offers a 457 plan.

Retirement Plans are Complicated

As I'm writing this, I'm getting just a bit of a headache. This stuff is complicated. Make sure you understand what your employer is offering you. Whether that is a 401(k), 403(b), TSP, 457 or business sector non-qualified plans.

Military Finances are Different

Civilians have access to 457 Plans, if they're employed by the right employers as do military members. But in a lot of significant ways, financial planning for Active and Retired Senior Military Officers and NCOs is different than planning for civilians. That is why we think you should work with a financial advisor that works with military members each and every day. If you'd like to find out how we work with clients like you, use the link below to schedule a free initial consultation.

If you found this article useful, you might like the following blog posts:

Military Finances 201: Contributing to Roth AND Traditional IRAs


Retired Military Finances 201: Buh-Bye GPO and WEP


Military Finances 201: Changes to the TSP I Fund


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