How it works
If you work for state and local governments such as public schools, colleges, universities, charities, and other tax-exempt entities (under section 501(c) of the IRS code), you may have the option of contributing to a 457 retirement account.
Operating much like 401k retirement accounts, a 457 plan is a voluntary retirement plan. It allows you to make pre-tax contributions from your paycheck into an account that grows tax-deferred until it is withdrawn in retirement. At the time you begin to take distributions, you'll pay income taxes on those amounts. And if you're lucky enough, employers may offer you a type of matching contribution, allowing you to save even more.
These types of retirement accounts follow the same contribution limits as 401(k) retirement accounts, but only if it is the only retirement plan your company offers. If your employer offers other plans (such as a 401(k) or 403(b) plan), you have the added benefit of contributing to both retirement accounts and investing the maximum into each. This can give you a real advantage in catching up on your retirement savings if you've fallen behind. Note: IRS rules may differ from year to year, so be sure to check specific contribution limits by visiting the IRS website.
If you take an early withdrawal from your 457 plan (before you turn age 59 ½), you won't be subject to an early withdrawal penalty as with 401k retirement accounts. However, you will owe income taxes on the amount of your withdrawal.