Many high earners who are diligent savers have the investment philosophy of first maxing out all of their available tax-advantaged retirement plans—whether Roth or traditional—before considering making an investment in an after-tax brokerage account. This often is very logical, and it probably makes sense for most individuals most of the time. However, non-governmental 457(b) plans may prove to be an exception for some individuals, especially if they anticipate a possible “tax bomb” in the future because of their own situation or the nature of the plan.

For me, the 457(b) plan of my employer, Washington and Lee University, has been a good fit for our family because of the financial strength of the university and the optionality it allows in distributions. Let me explain why.

What Is a 457(b) Plan?

457(b) plans are tax-advantaged retirement plans often available for state and local government employees along with those working for certain nonprofit organizations. The nice thing about 457(b) plans is that the 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 on 401(k) or 403(b) plans. Thus, a doctor working in academia could very well have a 403(b) plan and a 457(b) plan available to them, and they could contribute $24,500 to each plan in 2026 (subject to 415(c) limitations). This can potentially lead to huge current or future tax savings.

Another neat feature of 457 (b) plans is that, unlike many other retirement accounts, you don’t have to pay a 10% penalty for taking a distribution before someone has reached the age of 59 1/2.

However, not all 457(b) plans are created equal. In fact, some may be surprised to learn that governmental 457(b) plans are often much more favorable than their non-governmental counterparts because of their better asset protection, rollover flexibility, and distribution rules. Let’s go over each of these areas and explain how an employee with access to a non-governmental 457(b) plan might evaluate the merits of their specific plan.

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Drawbacks of a Non-Governmental 457(b)

With non-governmental 457(b) plans, the assets invested remain the property of the employer. This technically makes the plan an unfunded deferred compensation plan. For the vast majority of investors in these plans, this may be just a matter of semantics. But to the extent that the employer experiences financial trouble, creditors have access to these accounts to satisfy financial obligations of the employer. While it is extremely rare to hear about stories where 457(b) accounts have been used to satisfy claims of creditors, it has happened, and Dr. Jim Dahle has mentioned on the WCI podcast that he has heard of a physician group experiencing this.

You also have to worry about fees. After all, it costs something to run the plan, and that cost is often passed along to the employees.

Another disadvantage of non-governmental 457 plans is the inability to roll over money from most of these plans to an IRA or new retirement plan if you change jobs. Instead, you must abide by the distribution rules set out in the plan itself. Sometimes, you can have flexibility in how you decide to take your distributions, ranging from a one-time lump sum payment to a fixed payout over a certain number of years to purchasing an annuity. In other plans, you may only have the lump-sum option.  The problem with the one-time lump-sum payment for many doctors and other high earners is that this can create a “tax bomb” in the year they retire or change jobs.

Consider a physician earning $300,000 per year who, after 15 years with an employer, is changing jobs, and they have amassed $500,000 in their non-governmental 457(b) plan by maxing it out every year. If the distribution rules allow only for a lump-sum payout, the $500,000 would be taken out at once and layered on top of their $300,000 income, meaning that something like $200,000 would be lost in taxes.

Why You Might Use a Non-Governmental 457(b)

With these considerations in mind, let’s consider how a high earner may logically think through their potential participation in a non-governmental 457 plan. Because of the drawbacks previously addressed, the vast majority of high earners should first be sure that they are maxing out all other retirement plans available to them, including a 401(k), 403(b), solo 401(k), SEP-IRA, and Backdoor Roth IRA.

If all their other retirement accounts have been maximized, next consider the financial stability of the employer. While it is not necessary to become a forensic accountant and perform extensive due diligence, it is probably worthwhile to consider a medium- to long-term horizon and potential threats to the employer’s business. To the extent you are satisfied with your employer’s financial stability, then you need to fully understand the distribution options that will be available to you at whatever point you leave the employer. Plans that allow only for a lump-sum distribution really need to be considered carefully. Also take into account what your own financial situation may be at that point in time.

Obviously, this is impossible to anticipate precisely, but consider questions like this. How long do you anticipate being with the employer? What do you anticipate your future income to be when you leave the employer? Could you be inheriting a meaningful IRA that comes with required distributions? Only after considering these questions and mapping out various income scenarios in future years can you make an informed decision on whether to participate.

Why I Participate in My Employer’s Non-Governmental 457(b)

To make this a bit more tangible, allow me to walk through my own consideration of the non-governmental 457(b) plan made available to me through my employer, Washington and Lee University. First, I considered the financial stability of the university since I knew that creditors could potentially come after the plan to satisfy their obligations. As a smaller school that has an endowment hovering around $2 billion, I felt comfortable that there was not a significant near-term threat to its solvency. Though some colleges and universities are rightfully nervous about the expected decline in graduating high school students in the future, Washington and Lee enjoys a highly selective acceptance rate, meaning it has the flexibility to slightly increase its acceptance rate to the extent it needs to get the desired number of students in an entering class.

For these reasons, I decided that the threat of creditors using my non-governmental 457 plan to satisfy my employer’s financial obligations was minimal.

Next, I looked at the distribution options available to me from the plan when I leave or retire from the university and considered them in conjunction with my own expected future financial situation. Washington and Lee provides three options in its 457 (b) plan for distributions: 1) you can take a single lump-sum distribution in the year you leave or retire from the university; 2) you can select a fixed payout per year for anywhere from 5-15 years; 3) you can use the proceeds in your 457(b) account to purchase a single or joint life annuity or deferred annuity.

This flexibility was attractive to me. As I hoped to stay at Washington and Lee for a long time, I anticipated that I would build up a solid amount in the account if I maxed it out each year, making the lump sum option less attractive because of the high taxes I would pay. But the other two options were both attractive to me as I could see different life scenarios playing out where both options could be helpful.

Now understanding the options available to me in the plan, I also reflected on some nuances in my own financial situation. I anticipate being the beneficiary of a moderately sized inherited traditional IRA and know that, under current rules, I will need to withdraw all of the proceeds within 10 years of receiving it. If I receive this inherited IRA around the time I retire, the deferred annuity option (a lifetime monthly payment that starts at some point in the future) would likely be attractive. That way, I could use my inherited IRA to help fund my lifestyle in my 60s and use my deferred annuity along with delayed Social Security to help fund my lifestyle in my 70s and beyond, while never having a period where I would be in a high marginal tax bracket.

If, on the other hand, I was not receiving an inherited IRA in my 60s, I could select the fixed distribution over 5-15 years from the 457 plan to help fund my lifestyle in my 60s, and I could rely on delayed Social Security and other investments to fund my 70s and beyond. The important piece was that the flexibility of the plan options combined with my own situation left me feeling like there was minimal chance I would be forced into a “tax bomb” situation.

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The Bottom Line

Hopefully you now have some perspective on how to consider participation in a non-governmental 457 plan. To the extent the financial solvency of your employer and plan distribution options are attractive to you, it can be another great bucket to take advantage of tax-advantaged retirement savings. But to the extent you have concerns about your employer’s long-term solvency or if the plan distribution options could create tax problems for you in the future, there is no shame in just investing extra income in a non-tax-advantaged brokerage account.

Have you ever had to wrestle with contributing to a 457(b)? What did you think about? What did you ultimately do? 

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