“401(k) plans and 457 plans operate similarly, with the main difference being who is allowed to participate in each one.”
401(k) plans and 457 plans are two types of IRS-sanctioned, tax-advantaged employee retirement savings plans. With these plans, participants can deposit pre-tax money, which is then allowed to compound without being taxed, until it is withdrawn.
Investopedia’s recent article asks: “401(k) Plan vs. 457 Plan: What's the Difference?”
The article explains that these retirement savings accounts were designed to serve as one leg of the famous three-legged stool of retirement: workplace pension, Social Security and personal retirement savings. As workplace pensions become obsolete, however, personal retirement savings has increasingly come to be most people's primary retirement plan, along with Social Security.
401(k) plans are the most common type of defined contribution retirement plan. Employers sponsoring 401(k) plans may make matching or non-elective contributions for eligible employees. Earnings in a 401(k) plan accrue on a tax-deferred basis. These plans offer a menu of investment options, pre-screened by the sponsor and participants choose how to invest their money. They have an annual maximum contribution limit of $19,000, as of 2019. For employees over 50, both plans have a "catch-up" provision that allow up to $6,000 in additional contributions. Premature withdrawals from a 401(k), before age 59½, can trigger a 10% tax penalty. Plan participants can make early withdrawals from a 401(k) under "financial hardships," which are defined by each 401(k) plan.
457(b) plans are IRS-sanctioned, tax-advantaged employee retirement plans offered by state and local public employers and some nonprofit employers. They’re among the least common forms of defined contribution retirement plans. As defined contribution plans, both of these plans are funded, when employees contribute through payroll deductions. The plan participants set aside a percentage of their salary to put into their retirement account, without being taxed (unless the participant opens a Roth account, and any subsequent growth in the accounts is not taxed). In 2019, 457 plans have an annual maximum contribution limit of $19,000. For employees over 50, both plans contain a "catch-up" provision that allows up to $6,000 in additional contributions. Contributions to each plan qualify the employee for a "Saver's Tax Credit." It’s possible to take loans from both 401(k) and 457 plans.
However, 457 plans are a type of tax-advantaged non-qualified retirement plan and aren’t governed by ERISA. Since ERISA rules don’t apply to 457 accounts, the IRS doesn’t assess a "premature withdrawal" penalty to 457 participants, who take withdrawals before age 59½. Those withdrawals are still subject to normal income taxes.
457 plans also have a "Double Limit Catch-up" provision that 401(k) plans don’t. This is designed to allow participants who are near retirement to compensate for years when they didn’t contribute to the plan but were eligible to do so.
Both plans permit early withdrawals, but the qualifying circumstances for early withdrawal eligibility are different. With 457 accounts, hardship distributions are allowed after an "unforeseeable emergency," which must be specifically laid out in the plan's language. Both public government 457 plans and nonprofit 457 plans allow independent contractors to participate. Independent contractors aren’t eligible to participate in 401(k) plans. Because 457 plans are nonqualified retirement plans, you can contribute to both a 401(k) and 457 plan at the same time.
Remember that both plans are tax-advantaged retirement savings plans. 401(k) plans are offered by private employers, and 457 plans are offered by state and local governments and some nonprofits. The two plans are very similar, but because 457 plans aren’t governed by ERISA, some aspects like catch-up contributions, early withdrawals and hardship distributions are treated differently.
Reference: Investopedia (March 7, 2019) “401(k) Plan vs. 457 Plan: What's the Difference?”