The IRA, or Individual Retirement Arrangement, is an individual tax-advantaged retirement plan. It is not workplace-sponsored, and anyone who meets certain qualifications can start an IRA or Roth IRA. A Section 457 plan is a workplace sponsored plan, designed for government employees and certain employees of nonprofit organizations. The government or nonprofit sets up the plan, and employees set aside money pretax.
The traditional IRA goes back to 1974, when Congress passed the Employee Retirement Income Security Act, or ERISA. Originally, Congress developed the IRA to encourage workers not covered by employee pensions to set aside their own money for their own retirement security. As of 2011, investors can contribute up to $5,000 dollars and deduct contributions, provided they meet certain income qualifications. Workers 50 or older can contribute an additional $1,000 per year. Assets in IRAs grow tax-deferred until retirement. Withdrawals are taxed as income, and a 10 percent penalty generally applies to withdrawals prior to age 59 1/2.
Contributions to Roth IRAs are not tax deductible, but assets in the account grow tax free and there is no tax on income from the accounts in retirement. They have the same contribution limits as traditional IRAs, but the income thresholds to qualify for IRAs are lower than those required to qualify to make deductible contributions to traditional IRAs. Again, anyone can set one up individually, provided they have earned income and meet the income thresholds.
Section 457 Plans
Section 457 plans are considered non-qualified retirement plans. That is, they are not subject to regulation under ERISA. Government agencies and nonprofits set these plans up for their employees, who then elect to defer a portion of their salaries, pretax, to go into the Section 457. There is no 10 percent penalty on withdrawals from Section 457 plans prior to age 59 1/2, although withdrawals are taxed as ordinary income, just as IRAs and 401k plans.
IRA plans receive substantial protection from the claims of creditors; up to $1 million is exempt from creditor claims by federal law, and some states provide additional protections. Assets in Section 457 plans are also exempt from the claims of the workers' creditors. However, in some circumstances, these assets could be subject to the claims of creditors of the plan sponsor. This is because the law requires assets in these plans to incur the "substantial risk of forfeiture" to qualify for the favorable tax treatment afforded these plans.