Many high-income earners who save diligently often prioritize fully funding their tax-advantaged retirement accounts—like Roth or traditional plans—before putting money into a taxable brokerage account. This approach makes a lot of sense, generally speaking. However, when it comes to non-governmental 457(b) plans, some individuals may find exceptions, particularly if they foresee a potential “tax bomb” looming in their financial future.
In my case, the 457(b) plan offered by my employer, Washington and Lee University, has worked well for my family due to the university’s financial stability and the flexibility it provides regarding distributions. I’ll break down my reasoning.
What Is a 457(b) Plan?
457(b) plans are tax-advantaged retirement options that are typically available to state and local government employees, as well as employees of certain nonprofits. One of the advantages of these plans is that their annual contribution limit of $24,500 [2026 — visit our annual numbers page to get the most up-to-date figures] is separate from the contribution limits for 401(k) or 403(b) plans. Thus, a doctor in academia might have both a 403(b) and a 457(b) plan, allowing for contributions of $24,500 to each in 2026, as long as they stay within 415(c) limits. This could potentially result in considerable tax savings now or later.
Another appealing aspect of 457(b) plans is that, unlike many retirement accounts, there’s no 10% penalty for early withdrawals before reaching 59 ½.
Nevertheless, not all 457(b) plans are the same. Some may be surprised to find that governmental 457(b) plans typically offer far more favorable terms compared to their non-governmental equivalents, particularly in terms of asset protection, rollover options, and distribution rules. Let’s examine these areas to help individuals with non-governmental 457(b) plans evaluate their options.
Drawbacks of a Non-Governmental 457(b)
One notable disadvantage of non-governmental 457(b) plans is that the assets within them remain the employer’s property. This means the plan functions as an unfunded deferred compensation plan. For most investors, this is a mere technicality. However, if the employer experiences financial difficulties, creditors can access these accounts to cover the employer’s debts. While it’s quite rare to see 457(b) accounts used in this way, it has happened—Dr. Jim Dahle mentioned a situation on the WCI podcast where this occurred with a physician group.
Fees also come into play. Running the plan incurs costs, which often get passed on to employees.
Another limitation of non-governmental 457 plans is the difficulty of rolling money over into an IRA or a new retirement plan if you change jobs. Instead, you must adhere to the distribution rules specified in the plan. Distribution options can vary—sometimes you can choose between a lump sum, a fixed payout over several years, or an annuity, while other plans may only offer a lump-sum payout. For many high earners, taking a lump-sum distribution can lead to a significant tax increase in the year they retire or transition jobs.
Let’s take an example of a physician earning $300,000 annually, changing jobs after 15 years with their employer and having $500,000 in a non-governmental 457(b). If they’re required to take a lump-sum distribution, that $500,000 would be added to their annual income, which might result in losing around $200,000 to taxes.
Why You Might Use a Non-Governmental 457(b)
Considering these factors, let’s see how a high-income individual might rationally approach participation in a non-governmental 457 plan. Given the issues outlined, most high earners should ensure they’ve maximized contributions to all other available retirement plans, like a 401(k), 403(b), solo 401(k), SEP-IRA, and Backdoor Roth IRA.
If those are all maximized, then evaluating the employer’s financial stability becomes crucial. You don’t need to dive into forensic accounting but taking a look at medium- to long-term stability and potential risks to the employer’s business is probably worthwhile. If you’re confident in your employer’s financial future, it’s also essential to fully understand the distribution options available when you leave. Plans offering only a lump-sum option warrant close scrutiny. Additionally, reflect on your financial situation at that time.
This can be tough to predict accurately, but consider questions such as: How long do you plan to stay with the employer? What might your income look like upon departure? Could you be expecting an inherited IRA that has required distributions? By considering these questions and mapping out possible future income scenarios, you’ll be better equipped to decide on participation.
Why I Participate in My Employer’s Non-Governmental 457(b)
To illustrate, I’ll share my thoughts on the non-governmental 457(b) plan offered by my employer, Washington and Lee University. I first assessed the university’s financial stability, given the possibility of creditors needing to access the plan for obligations. With the university boasting an endowment near $2 billion, I felt reassured regarding its solvency. Although some institutions worry about declining high school graduation rates, Washington and Lee’s selective admissions enable it to adjust acceptance rates as needed.
This gave me confidence that the risk of creditors accessing my 457 plan was minimal.
Next, I examined the distribution options upon leaving or retiring from the university against my projected financial situation. The 457(b) plan offers three options for distributions: 1) a single lump-sum payout upon leaving; 2) a fixed annual payout for anywhere from 5 to 15 years; or 3) using the funds to secure a single or joint life annuity or deferred annuity.
This flexibility intrigued me. As I planned to stay at Washington and Lee for an extended period, I anticipated accumulating a substantial amount in my account, rendering the lump-sum option less appealing due to the high tax implications. The other two options were tempting as they provided various scenarios that could be advantageous.
In understanding my available options, I also thought about nuances in my financial picture. I expect to inherit a moderate-sized traditional IRA, which, based on current rules, requires withdrawals within 10 years. If I receive this as I retire, the deferred annuity option could be beneficial. I could use the inherited IRA for my expenses in my 60s and the deferred annuity, along with delayed Social Security, to support myself in my 70s, minimizing the chance of entering a high tax bracket.
Conversely, if I don’t inherit an IRA during my 60s, I could opt for a fixed distribution from the 457 plan to help during that decade and use delayed Social Security and other investments for my later years. Ultimately, the plan’s flexibility, combined with my situation, made me feel confident I wouldn’t face a taxing situation.
The Bottom Line
Hopefully, this sheds some light on how to weigh participating in a non-governmental 457 plan. If both your employer’s financial health and the plan’s distribution options look promising, it can be another useful avenue for tax-advantaged retirement savings. On the other hand, if you’re concerned about your employer’s stability or the plan’s distribution implications, it’s perfectly acceptable to invest additional income in a non-tax-advantaged brokerage account.
Have you ever grappled with contributing to a 457(b)? What thoughts crossed your mind? What decision did you ultimately reach?
