What’s the maximum 457b contribution in 2022?

While most people may be familiar with retirement plans such as 401(k) and 403(b), 457(b) plans are less popular. A 457(b) plan is an employer-sponsored retirement that is available to employees of state and local governments as well as 501(c) organizations. It shares some features with 401(k), but it also has some unique features.

In 2023, the maximum 457(b) contribution is $22,500, up from $20,500 in 2022. Employees who are age 50 or older can make catch-up contributions of $7,500, for a total contribution of $30,000 in 2023. The total contribution to a 457(b) plan cannot exceed 100% of an employee’s income.

What is a 457(b) plan?

A 457(b) plan is a retirement plan that is provided to employees of state governments, local governments as well as non-profit organizations. It allows employees to make tax-deferred contributions to the plan, and only pay income taxes when they make a withdrawal.

457(b) contributions are deducted from your earnings and may be subject to taxes depending on the type of 457(b) plan you have. If you have a traditional 457(b) plan, the plan contributions are deducted from your pre-tax earnings, hence lowering your tax bill.

Some employers may offer a Roth 457(b) plan, which allows after-tax contributions. This means that you fund the plan with money that is already taxed, and you won’t owe taxes when you make qualified withdrawals.

2022 Contribution Limits for 457(b) Plans

457(b) has similar contribution limits to a 401(k). For 2022, 457(b) participants can contribute $20,500 to the plan, up from $19,500 in 2021. Employees may also receive matching contributions. Typically, contributions made to the 457(b) plan cannot exceed 100% of an employee’s compensation.

457(b) plans may allow catch-up contributions of up to $6,500 for employees who are age 50 or older. Additionally, employees within three years from retirement can contribute an additional catch-up contribution of up to double the contribution limit or 100% of their compensation, whichever is lesser. For 2022, eligible workers can contribute up to $41,000. However, participants cannot benefit from both the regular catch-up contribution and special catch-up contribution in the same year.

2023 Contribution limits for 457(b) plans

For 2023, you can contribute up to $22,500 to a 457(b) plan, up from $20,500 in 2022, including any employer contributions. For example, if you receive $5,500 in employer contributions, you can contribute a maximum of $17,000 to attain the annual contribution limit. If you are age 50 or older, your plan provider may allow you to contribute an additional $7,500 in catch-up contributions, bringing the total contribution to $30,000.

Participants nearing retirement may also be eligible for a special catch-up contribution of up to double the annual contribution. For 2023, the special catch-up contribution can be up to $45,000. However, the additional contributions cannot exceed the value of unused contributions from the previous years. Hence, if participants maxed out their 457(b) contributions every year, they won’t be eligible for the catch-up contribution.

457(b) vs. 403(b) Comparison    

If you are a public service employee or an employee of certain non-profit organizations, your employer may offer either a 457(b) or 403(b) plan. However, these plans have several differences.

Employee contributions

457(b) and 403(b) plans have similar contribution limits. For 2023, eligible employees can contribute up to $22,500. Both types of retirement plans allow employer contributions, but they are rare in 457(b) plans.

When considering employee and employer contributions, 403(b) plans allow higher contributions than 457(b) plans. For 2023, the cumulative employee and employer contributions to a 403(b) plan can be up to $66,000, while the combined contribution limit to a 457(b) plan is $30,000 in the same period.

Catch-up contributions

A 457(b) plan allows participants within three years from retirement to double their contributions, while a 403(b) allows employees who have worked for the same employer for 15 years to contribute an additional $15,000 in additional catch-up contributions.

Early withdrawals

When you retire or resign from your sponsoring employer, you can withdraw money from your 457(b) plan penalty-free, regardless of your age. However, 403(b) plans allow penalty-free withdrawals at age 59 ½. On the other hand, a 403(b) plan may allow participants to access their money while still working, while a 457(b) plan restricts withdrawals while still working.

Pros of 457(b) Plans

Tax benefits

If you have a traditional 457(b) with your employer, the plan contributions will be deducted from your earnings on a pre-tax basis. The contribution is deducted from your gross income, hence lowering the taxes paid for the year.

For example, if you earn $7,000 every month, and contribute $1,000 to a 457(b) plan, your taxable income will be $6,000.

Additionally, any interest and earnings generated each year will grow tax-deferred, and you will only owe taxes when you make a withdrawal.

No early withdrawal penalty

Unlike other retirement plans like 401(k) and 403(b), a 457(b) plan does not impose an early withdrawal penalty. If you retire or resign at any age, you can withdraw your retirement savings without paying a 10% penalty on the withdrawal. However, there is an exemption to this rule- if you roll over your 457(b) money to another tax-advantaged retirement plan like IRA or 401(k), you will owe a 10% early withdrawal penalty.

Cons of 457(b) plans

Employer match is rare

Employers may make matching contributions to an employee's 457(b) plan, but most employers choose not to. If you receive matching contributions, the contributions count towards the annual contribution limit. For example, if the employer contributes $4,500 to your 457(b) in 2023, you will be eligible to contribute up to $18,000. However, if you are within three years from retirement, you can contribute an additional $40,500 in 2023.

Limited investment choices

457(b) plans have limited investment options, and you will only get access to mutual funds and annuities. You won’t get access to stocks or exchange-traded funds in a 457(b) plan. If you want additional investment options, you should complement your 457(b) savings with an IRA, which offers a wider pool of investment options. 

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