Roth IRA vs 457 Retirement Plan: What’s the Difference?

Understanding the Tax Advantages of Roth IRAs and 457 Retirement Plans

When it comes to planning for your retirement, it’s important to explore all the available options and understand the tax advantages they offer. Two popular choices among individuals are Roth IRAs and 457 retirement plans. While both offer tax benefits, they have distinct features that make them suitable for different situations. In fact, you may even be eligible to contribute to both. Let’s delve into the details of these retirement plans and explore their tax advantages.

Roth IRAs

A Roth IRA is an individual retirement account that allows you to contribute after-tax income. This means that the money you contribute to a Roth IRA has already been taxed, so you won’t owe any taxes on qualified withdrawals in retirement. One of the key advantages of a Roth IRA is that your investment earnings grow tax-free. This means that any capital gains, dividends, or interest earned within the account are not subject to taxation.

Another benefit of Roth IRAs is that they offer flexibility when it comes to withdrawals. Unlike traditional IRAs or 401(k) plans, there are no required minimum distributions (RMDs) for Roth IRAs during your lifetime. This allows you to keep your money invested for as long as you wish, potentially maximizing your savings and leaving a larger inheritance for your beneficiaries.

However, it’s important to note that there are income limits for contributing to a Roth IRA. For 2021, the income limit is $140,000 for single filers and $208,000 for married couples filing jointly. If your income exceeds these limits, you may not be eligible to contribute directly to a Roth IRA. However, there is a workaround known as a backdoor Roth IRA conversion, which allows high-income earners to contribute indirectly.

457 Retirement Plans

A 457 retirement plan is a tax-advantaged retirement account offered by governmental and certain non-governmental employers. It allows employees to defer a portion of their salary into the plan, reducing their taxable income. The contributions made to a 457 plan grow tax-deferred, meaning you won’t owe taxes on the money or any investment gains until you withdraw them in retirement.

One of the unique advantages of 457 plans is that they offer a higher contribution limit compared to other retirement accounts. For 2021, the maximum contribution limit for a 457 plan is $19,500. Additionally, individuals who are within three years of their plan’s normal retirement age may be eligible for a catch-up contribution, allowing them to contribute even more.

Another significant benefit of 457 plans is that they have no early withdrawal penalty. This means that if you retire or leave your job before the age of 59 ½, you can access your funds without incurring the usual 10% penalty that applies to other retirement accounts. However, keep in mind that you will still owe income taxes on any withdrawals.

Contributing to Both

If you meet the eligibility criteria, you can contribute to both a Roth IRA and a 457 retirement plan simultaneously. This can be a powerful strategy for maximizing your retirement savings and diversifying your tax advantages.

By contributing to a Roth IRA, you can benefit from tax-free growth and tax-free withdrawals in retirement. On the other hand, contributing to a 457 plan allows you to reduce your taxable income in the present and take advantage of potentially higher contribution limits.

However, it’s important to consider your financial situation and goals before deciding on contributing to both plans. Evaluate factors such as your income level, tax bracket, and retirement timeline to determine the most suitable allocation of your retirement savings.


Planning for retirement requires careful consideration of the available options and their respective tax advantages. Roth IRAs and 457 retirement plans offer distinct benefits that can help you achieve your retirement goals. While a Roth IRA provides tax-free growth and withdrawals, a 457 plan allows for tax-deferred growth and higher contribution limits. If you meet the eligibility criteria, contributing to both can be a smart strategy to maximize your savings and diversify your tax advantages. Consult with a financial advisor to determine the best approach based on your individual circumstances and secure a comfortable retirement.

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