In 2025, state and local government employees will benefit from an increase in the maximum allowable contribution limit for their 457 retirement plans. The contribution limit will go up to a new high of $23,500 against the previous year’s $23,000 in 2024. This increase assists employees not only in boosting their retirement savings in a tax-advantaged account but also everyone; they are allowed to save the contributions in a pre-tax earnings account to defer taxes on both contributions and investment growth until withdrawals in retirement.
Additional catch-up contributions for older workers
The 457 plan includes unique catch-up contribution options, making it attractive for older employees nearing retirement.
- Age 50+ Catch-Up Provision: Workers aged 50 or older can contribute an additional $7,500 on top of the standard limit, bringing their total allowable contribution to $31,000 in 2025.
- SECURE 2.0 Enhancements for Ages 60-63: Starting in 2025, individuals aged 60 through 63 can take advantage of a higher catch-up limit. This enhanced provision allows contributions of $10,000 or 150% of the age 50+ catch-up limit, whichever is greater. For 2025, the catch-up amount for this group is $11,250. However, once a participant turns 64, the catch-up limit reverts to the standard age 50+ amount.
Restrictions on double catch-up contributions
When employees satisfy the requirements for catch-up contributions for age 50 and older as well as for the three-year period before their retirement, they will have to choose between the two options, with the one yielding the greater contribution limit. According to IRS guidelines, it is impossible to utilize both provisions because doing so would violate any pretenses of equality in retirement savings plans.
Tax advantages of a 457 plan
Like a traditional 401(k) or 403(b), contributions to a 457 plan are made on a pre-tax basis, reducing the participant’s taxable income for the year. Contributions and investment earnings grow tax-deferred until withdrawn. Unlike many other retirement accounts, 457 plans do not impose early withdrawal penalties, even for distributions taken before age 59 ½. However, regular income taxes will apply to withdrawals.
Enrollment process for 457 plans
Private-sector 401(k) plans are automated enrollments for employees; in contrast, most 457 plans are required to have employees actively enroll due to the state or local legislation. Employees would then seek investment options in their plans that are consistent with retirement needs.
It is difficult for federal workers or federal authorities to create a 457 plan. They might ask for their signing up by themselves for a program without auto-enrollment, like few private-sector 401(k) plans possess. It is better for every worker to research the investment options available for him/her to know which ones fit his retirement goals.
Investment options for 457 plans
457 plans offer a range of investment choices, allowing participants to build diversified portfolios tailored to their financial goals and risk tolerance. Common investment options include:
- Target-Date Funds: These funds automatically adjust their investment mix as the participant approaches retirement. For example, a worker planning to retire around 2045 might choose a target-date fund labeled with that year. These funds typically start with a higher allocation to stocks for growth and gradually shift toward bonds for stability as retirement nears.
- Index Funds and Actively Managed Funds: Many 457 plans provide a selection of index funds, which track market benchmarks, and actively managed mutual funds, which aim to outperform the market.
- Fixed-Income Funds and Managed Accounts: Fixed-income funds offer lower-risk options, while managed accounts provide professional oversight to align investments with individual goals and risk preferences.
Benefits of target-date funds
Indeed, target date funds make investing decisions much easier for the participants. Younger workers may be aided by higher allocations to stocks for growth in such funds. The portfolio then becomes more conservative, moving into bonds prior to target retirement dates to preserve the accumulated capital. It tells employees not to worry about management because they’ll be holding the course toward retirement.
By taking advantage of increased contribution limits, improved catch-up provisions, and enhanced investment diversification, state and local government employees can optimize their 457 plans to better ensure financial independence in retirement.
