For California Public Sector Employees: What’s the Difference Between a 457(b) and a 401(k)?

I remember when I first started working for the state and got handed that giant benefits packet from HR. One form in particular gave me pause - opting into a 401(k) or 457(b) account.

I vaguely knew what a 401(k) was, had never heard of a 457(b), and I wasn’t even sure if I needed to put money away into either account since I was vesting towards a CalPERS pension anyway.

In the end, I procrastinated through most of my probation period, and finally just opened both accounts and put a few bucks into each per month. So you don’t have to go through the same procrastination process I did, let’s break it down:

First, what are these mysterious numbers?

Both 457(b) and 401(k) plans are types of defined contribution retirement accounts. They let you save money for retirement in a tax-advantaged way, meaning you can either reduce your taxable income now by contributing pre-tax dollars (which lower your taxable income) or contribute after-tax with a Roth option.

But they aren’t identical twins. Think of them more like siblings.

Key Differences Between a 457(b) and a 401(k)

1. Who they’re for

• 401(k): Common in private companies, but some public sector employers like the State of California also offer them.

• 457(b): Specially designed for government employees (like state workers) and certain nonprofits.

If you’re working for the state of California, you have access to both through Savings Plus.

2. Contribution limits

Good news: both plans share the same annual contribution limit set by the IRS ($23,000 for 2025 if you’re under 50, plus an extra $7,500 if you’re 50+).

Better news: if you have both a 401(k) and a 457(b), you can max them out separately.

That means potentially saving $46,000/year (or $61,000 if you’re 50+). Not everyone can swing that on a government salary, but it’s an option.

3. Catch-up contributions

• 401(k): If you’re 50+, you get that $7,500 “catch-up.”

• 457(b): Offers something extra: within three years of “normal retirement age,” you may be able to contribute up to double the annual limit if you didn’t max out your contributions in previous years. You cannot combine this with the age-50 catch-up contribution.

4. Withdrawals and penalties

• 401(k): If you take money out before age 59 ½, you’ll usually owe a 10% penalty plus income taxes.

  • 401(k)s are easy to move to another employer, as they are commonly offered in the private sector and some public sector workplaces. You could even roll your old 401(k) into a personal IRA.

• 457(b): If you separate from service (quit, retire, get laid off), you can tap the account at any age without the 10% early withdrawal penalty. Taxes still apply, but not tax penalties for early withdrawals.

  • In other words, 457(b)’s flexibility could be helpful if you think you might need to take withdrawals earlier than age age 59½ and don’t want to pay that additional tax penalty.

5. Investment options

Both the 401(k) and 457(b) accounts are offered through SavingsPlus. You can let HR know you want to start contributing to one or both, and can choose between various investment funds. By default you’ll most likely be placed into a “target date fund” that’ll get more conservative as you get closer to a “target” retirement age. Make sure to carefully review each fund’s investment objective and their associated fees.

So, which should I choose?

• If you want maximum retirement savings power and have the income: Contribute to both.

• If you want flexibility in accessing the funds: Prioritize the 457.

• If you want something that’ll be easy to roll-over to another employer or retirement account: Go for the 401(k).

The bottom line

For California state employees, having access to both a 401(k) and a 457(b) is a good problem to have. Think of the 401(k) as the classic retirement account, and the 457 as the one with some fun extra twists.

Still not sure which to prioritize? Just want someone to talk you through all the different Savings Plus options and how these accounts fit into the bigger picture of your retirement savings?

Schedule a call to see if we’d be a good fit for working together on a personalized retirement strategy.

Disclaimer: This information is for educational purposes only and doesn't constitute financial advice. Consider consulting with a fee-only financial planner for personalized guidance.