How To Use Roth 457 Plans

When it comes to retirement planning, 457 plans are kind of the neglected younger sibling of the better known 401k plans. Both are employer sponsored retirement plans, meaning your employer has to set them up for you, unlike an IRA or Roth IRA which are individual retirement plans. However, a 457 plan is a special retirement savings plan in that it is only allowed for certain organizations, specifically governmental employers and non-profit employers. The non-profit 457 plans are known as non-governmental 457 plans and are less flexible.

For governmental 457 plans, the main advantage is that unlike 401k plans, there is no 10 percent penalty for withdrawing money from a 457 plan prior to age 59 1/2 like there is for a 401k savings plan. However, withdrawals from a 457 plan are taxable, just like withdrawals from a 401k plan are taxable.

Which, brings us to the Roth 457 savings plan.

Roth 457 Retirement Plan

roth 457 retirement planAs you can probably guess from the name, a Roth 457 plan has similar tax-advantages to a Roth IRA, or Roth 401k, namely that withdrawals from the account are tax-free, rather than taxable. In exchange, you do not get the up-front tax savings from your contributions like you do with a traditional IRA or traditional 401k retirement plan.

In order to use a Roth 457 retirement account, your employer must first offer that option. An employer may offer only a regular 457 plan, or may offer both a Roth 457 account and a traditional 457 account. For example, the State of Colorado offers a Roth 457 retirement account plan option via Colorado PERA.

If your employer does offer a Roth 457 plan, then you contribute via salary deferral just like with a standard 401(k) plan. Your deferral may be as a percentage of salary, a fixed amount contribution, or other option, up to the annual maximum 457 contribution allowed by law and your plan. There are no coordination rules with 457 plans versus 401k plan anymore. That means you can make the maximum 401k contribution AND another full maximum annual contribution to your 401k plan, for a total of $36,000 ($18,000 each, with a catch-up contribution allowed for those age 50or older).

Your contributions are after-tax. That means that the amount you contribute still counts as taxable income.

Withdraw from Roth 457 Plan

The main advantage of a 457 plan over a 401k plan is that there is no 10 percent tax penalty on withdrawals made before age 59 1/2. However, in order for a withdrawal from a Roth 457 contribution to be tax-free, the plan participant must be older than 59 1/2. In addition, the first contribution to the Roth 457 plan has to have been made at least five years before the withdrawal.

It is easier to understand with a quick table:

  • All withdrawals from a regular 457 plan are taxable.
  • Early withdrawals from a regular 457 plan are taxable but NOT subject to an additional 10 percent penalty like early withdrawals from a 401k plan are.
  • Early withdrawals from a Roth 457 plan are also not subject to a ten percent penalty. However, early withdrawals ARE subject to ordinary income taxes.
  • Withdrawals from a Roth 457 plan after age 59 1/2 are both tax-free and penalty free.
  • Withdrawals from a Roth 457 plan where the first contribution was made during the last 5 years are taxable regardless of age.

Which is Better Roth 457 or Regular 457 plans?

Determining whether a traditional 457 plan is better than a Roth 457 plan or if a Roth 457 retirement plan is better than a regular 457 retirement plan is kind of a tricky question. The answer, depends upon whether or not you ever take an early withdrawal.

If you end up taking an early withdrawal, then the regular 457 plan is better than the Roth 457 plan.


The traditional 457 plan gives you a tax-savings on every contribution you make. The Roth 457 plan offers no tax-savings or deduction on contributions. However, both plans will make you pay regular income taxes if the withdrawal is early. In other words, for an early withdrawal from a Roth 457 plan, you will pay taxes both on the contributions and on the withdrawals. On an early withdrawal from the traditional plan, you will only pay on the withdrawal, not the contribution.

If you do not take an early withdrawal, then the difference is the same as the difference between a Roth IRA and traditional IRA. Assuming the money invested inside your account grows over several years, you will probably save by not paying taxes on a much larger amount than your contributions. However, you may be in a lower tax bracket during retirement, so you may have reaped a bigger reward by getting tax savings while working. This is especially true for contributions made near retirement.

If you consider your 457 plan to be part of your emergency fund, then do not use the Roth option. If you (more wisely) intend to never withdraw from your 457 plan until you retire, then the Roth options is viable.


7 thoughts on “How To Use Roth 457 Plans”

  1. Pingback: Colorado Secure Savings Program - Retirement - The Finance Gourmet

  2. One thing to keep in mind is that most people that have 457’s also have a pension. When you retire you’ll have your pension income as well as your Social Security income. This income will likely put you in a relatively higher tax bracket. Because of this, putting your money in the Roth might make more sense.

    Also, if you live in a state with no state income tax and you put money into a regular 457, then if you live in a state with income tax when you withdraw it you will have to pay state income tax. A Roth would be better here.

  3. I have both a personal roth IRA & a roth 457 through my employer. If I retire at 55, couldn’t I roll all of my roth 457 into my personal roth IRA? I could then withdrawl my principle (contributions, not earnings/capital gains) mininumly to last me until 59.5 years old with out being penalized on any taxes?

    1. County Employee

      Jason, if you find the answer, please tell me! I work in California and I can retire at 50..I am a County employee and I also have a Roth 457 and a pension..I plan on using my Roth457 money to fund my kids college funds…and I intend to only withdraw the contributions not the earnings but when I called the company that manages my Roth 457 I was told I would only be able to withdraw 75% of the contributions and I would be forced to withdraw 25% of the earnings =(. Even after the 5 year rule had been met and I was under 59 1/2…contact whoever manages your ROTH457 account, mine is thru Fidelity

      1. Look into a “in service distribution/rollover” if you are still employed and want to take out contributions. This allows you to roll as much as you want into your Roth IRA, and when it comes over, the contributions are still separated from the earnings. ROTH IRA then allows you to take the contributions only.

        If you are separated from the county, just roll it over to your ROTH IRA and take the contributions.

        I’m in the same boat on this matter and did a lot of research for it.

      2. I had the same thought that i would sock away funds in 457b Roth and withdraw contributions to fund college for kids while the earnings continue to grow. Sounds like if I am under 59.5 years that would not work without extra tax on the contributions. Does anyone have answers?

        1. The thread is over half a year old, but here’s the deal on 457b and Roth 457b early withdrawals.

          If you withdraw:
          A) the year you leave work or after
          1) traditional — no penalty, but pay income tax.
          2) Roth — no penalty, but pay income tax if it’s before the year you turn 55 (same as Age 55 Rule for 401k’s and 403b’s).

          B) before the year you leave work:
          1) traditional — pay both penalty and income tax,
          2) Roth — pay both penalty and income tax.

          C) On or after the year you turn 59 and a half (your plan may not allow this if you’re still employed, but all plans allow it if no longer employed):
          1) traditional — no penalty, but pay income tax
          2) Roth — no penalty or income tax

          Note that any time you pay income tax on Roth withdrawals you’re basically being double-taxed because you paid taxes during contributions too (didn’t get a tax break).

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