AZ Smart Save: Your Arizona State 457(b) Guide
As an employee of the State of Arizona, your ASRS pension provides a solid foundation for retirement. However, it's not designed to replace 100% of your pre-retirement income. Without automatic cost-of-living adjustments, your monthly ASRS benefit will stay the same even as expenses rise.
That’s where AZ Smart Save comes in. Here’s how to use this powerful savings tool to build a more secure retirement.
What Is AZ Smart Save?
AZ Smart Save is Arizona's voluntary retirement savings program available to state employees and university workers. It's a 457(b) deferred compensation plan similar to a 401(k) in the private sector, but with some important advantages for public employees.
The plan is administered by Nationwide Retirement Solutions and overseen by ASRS. It offers both traditional pre-tax and Roth after-tax contribution options, giving you flexibility in how you save for retirement.
Eligibility
You can participate in the AZ Smart Save program if you are:
A state agency employee
An employee of Arizona State University
An employee of a participating ASRS employer
Education employees working for school districts (not state universities) typically have access to a 403(b) plan instead of or in addition to the 457(b).
How Your 457(b) Plan Works
A 457(b) is a tax-advantaged retirement savings account that operates similarly to a 401(k). You contribute money from each paycheck, and that money gets invested in funds you choose. Your investments grow over time, and you can access the money when you retire or leave state employment.
Here’s a deeper rundown:
1. Your Contributions Go In
You decide how much to contribute (either a percentage of your salary or a flat dollar amount per pay period). The money comes directly from your paycheck before you see it, making saving automatic.
2. Your Money Gets Invested
Your contributions go into the investment options you select (stock funds, bond funds, target-date funds, etc.). You control where your money is invested and can change your investments at any time.
3. Your Account Grows
Your investments earn returns over time through a combination of market growth, dividends, and interest. All growth is tax-deferred (or tax-free for Roth contributions), meaning you don't pay taxes on investment gains each year.
4. You Access It in Retirement
When you retire or leave state employment, you can withdraw your money. With traditional pre-tax contributions, you pay income tax on withdrawals. With Roth contributions, qualified withdrawals are completely tax-free.
Why Arizona State Employees Need Supplemental Savings
In most cases, your ASRS pension won't be enough for a comfortable retirement by itself. That makes supplemental savings crucial for your golden years.
ASRS Limitations
The average ASRS benefit for retirees with 20+ years of service is approximately $1,700 per month. While this provides a solid base, consider these realities:
No automatic cost-of-living adjustments: Your monthly ASRS payment stays the same regardless of inflation.
Designed as partial income: ASRS is meant to provide less than 100% of your retirement income.
Healthcare costs: Medical expenses typically rise significantly in retirement.
Longer retirements: People are living longer, meaning your savings need to last longer.
The Three-Legged Stool
The ASRS was designed as one of three income sources for retirement:
Your ASRS pension
Social Security benefits
Personal savings (457(b), IRAs, other investments)
Without all three legs, your retirement stool becomes unstable. It’s never a good idea to lean too heavily on just your ASRS.
457(b) Contribution Limits for 2025
For 2025, you can contribute up to $23,500 to your 457(b) plan. This applies whether you make traditional pre-tax contributions, Roth after-tax contributions, or a combination of both. If you're 50 or older, you can contribute an additional $7,500 per year, bringing your total to $31,000.
Special Pre-Retirement Catch-Up
If you're within three years of your plan's normal retirement age and haven't maxed out contributions in previous years, you may be eligible to contribute up to double the annual limit (up to $47,000 in 2025). This special catch-up provision helps employees who started saving late to make up for lost time.
Note: You cannot use both the age 50+ catch-up and the special pre-retirement catch-up in the same year. You must choose whichever gives you the higher contribution limit.
Traditional Pre-Tax vs. Roth 457(b) Contributions
Just like most 401(k) plans, AZ Smart Save offers both traditional and Roth contribution options.
Traditional Pre-Tax Contributions
With traditional contributions, money is deducted from your paycheck before taxes. You don't pay income tax on contributions now, but withdrawals will be taxed as ordinary income in retirement. This gives several advantages:
Immediate tax savings (lowers your taxable income now)
More money available to invest (since you're not paying taxes up front)
Good if you expect to be in a lower tax bracket in retirement
Example: If you contribute $10,000 pre-tax and you're in the 22% tax bracket, you save $2,200 in taxes this year.
Roth After-Tax Contributions
With Roth contributions, money is deducted from your paycheck after taxes. You pay income tax on contributions now, but qualified withdrawals in retirement are completely tax-free. This has its own advantages:
Tax-free growth and withdrawals in retirement
No required minimum distributions (RMDs) for Roth 457(b)
Good if you expect to be in a higher tax bracket in retirement
Provides tax diversification
Example: If you contribute $10,000 to a Roth account and you're in the 22% tax bracket, you pay $2,200 in taxes this year, but all withdrawals in retirement are tax-free.
Which Should You Choose?
The decision depends on your current tax situation and expectations for retirement.
Consider traditional contributions if:
You're currently in a high tax bracket.
You expect to be in a lower tax bracket in retirement.
You need the immediate tax deduction to afford higher contributions.
You have a pension coming that will provide a baseline income.
Consider Roth contributions if:
You're early in your career with a lower income (and a lower tax bracket).
You expect to be in a higher tax bracket in retirement.
You want tax-free income in retirement.
You want flexibility (no RMDs on Roth contributions).
You already have substantial pre-tax retirement savings.
Best strategy for many: Contribute to both. This gives you tax diversification and flexibility to manage your tax situation in retirement.
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Key Advantages of 457(b) Plans over 401(k)s
While a 457(b) is similar to a 401(k), the AZ Smart Save offers several advantages over a standard 401(k) program.
No Early Withdrawal Penalty
This is the biggest advantage. With a 457(b), you can access your money penalty-free upon separation from service, regardless of your age. There's no 10% early withdrawal penalty that applies to 401(k) withdrawals before age 59½.
This means that if you retire at age 55 from state employment, you can immediately start withdrawing from your 457(b) without any penalty (though you'll still pay regular income taxes). This makes the 457(b) an excellent tool for early retirement planning.
Separate Contribution Limits
457(b) contribution limits are completely separate from 401(k) and 403(b) limits. If your employer offers both types of plans, you could potentially contribute $23,500 to each, for a total of $47,000 in tax-advantaged retirement savings in 2025.
Note: Most Arizona state employees won't have access to both, but university employees might have access to both a 457(b) and a 403(b).
You Can Contribute to an IRA Too
You can max out your 457(b) and still contribute to an IRA (traditional or Roth, subject to income limits). The 457(b) doesn't reduce your ability to contribute to an IRA.
Investment Options and Fees
Your 457(b) through Nationwide offers a range of investment options designed for different risk tolerances and time horizons. This includes:
Target-date funds (these automatically adjust asset allocation as you near retirement)
Stock funds (domestic and international)
Bond funds
Money market funds
Managed account option (professional management for a fee)
Self-directed brokerage options
Fees
One of the advantages of AZ Smart Save is access to institutional-class investment options with lower fees than you'd typically find in retail investment products. Fees vary by investment option, but the plan emphasizes low-cost index funds and target-date funds. These lower fees mean more of your money stays invested and compounds over time.
When Can You Access Your 457(b) Money?
Upon Separation from Service
You can withdraw money from your 457(b) after you separate from state employment (retire, resign, or are terminated). There's no minimum age requirement and no early withdrawal penalty.
Key point: You must actually separate from service. You can't take distributions while still employed (except in cases of unforeseeable emergency).
Emergency Withdrawals
If you're still employed but face an unforeseeable financial emergency, you may be able to withdraw money. This is a high bar to meet and requires documentation. Examples include sudden serious illness, loss of property due to casualty, or similar extraordinary circumstances.
Required Minimum Distributions
For traditional pre-tax 457(b) accounts, you must begin taking RMDs at age 73 (if you were born in 1951 or later). The RMD is calculated based on your account balance and life expectancy.
For Roth funds, there’s great news! Thanks to SECURE 2.0, starting in 2024, Roth 457(b) accounts are NO LONGER subject to RMDs during your lifetime. This change aligns Roth 457(b) rules with Roth IRA rules, giving you more flexibility and allowing your Roth money to continue growing tax-free without forced withdrawals.
How Much Should You Contribute to Your 457(b)?
The right contribution amount depends on your individual situation. Generally, you should aim to save 10%–15% of your gross salary across all retirement accounts (ASRS contributions, 457(b), and any other retirement savings). Since ASRS requires a 12% contribution (split between you and your employer), adding another 10%–15% of your own money to a 457(b) puts you in a strong position.
Later in your career, ramping up your savings for retirement is more important than ever. If possible, you’ll want to max out your contributions ($31,000+ with catch-ups). Use the special pre-retirement catch-up if eligible, and focus on setting up your portfolio for near-retirement.
Order of Priority
If you can't max out everything, prioritize in this order:
ASRS contributions: These are mandatory, so this happens automatically.
Health savings account (HSA) contributions: If you have a high-deductible health plan, max out your HSA ($4,300 individual/$8,550 family in 2025). This will give you a triple tax-advantaged account to cover medical expenses.
457(b) contributions: Contribute up to the annual limit if possible.
IRA contributions: Invest in traditional or Roth accounts, depending on income limits.
Taxable investment accounts: Once you've maxed out all tax-advantaged options, this can make a good final step in your retirement strategy.
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How to Enroll in AZ Smart Save
Step 1: Contact Nationwide
Call Nationwide Retirement Solutions or visit the ASRS website to find enrollment information.
Step 2: Complete Enrollment
You can enroll online through Nationwide's portal or complete paper enrollment forms. You'll need:
Your Social Security number
Employment information
Beneficiary designations
Contribution amount or percentage
Investment selections
Step 3: Choose Your Contributions
Decide:
What percentage of your salary or flat dollar amount you want to contribute per pay period
Whether you want to make traditional or Roth contributions (or a combination of both)
Step 4: Set Up Your Investments
Select where your contributions will be invested. If you're unsure, a target-date fund based on your expected retirement year is a simple, diversified option.
Coordinating Your 457(b) with ASRS and Social Security
Your 457(b) doesn't exist in isolation. Here's how it fits into your complete retirement picture.
ASRS pension: Provides guaranteed lifetime income. Think of this as your foundation.
Social Security: Additional guaranteed income (for most Arizona state employees). Delay claiming until age 70 if possible for maximum benefit.
457(b) and other savings: Provides flexibility, supplements guaranteed income, and helps with large expenses or inflation protection.
In retirement, you can withdraw from different accounts strategically to stay in lower tax brackets, manage Medicare premiums (which are based on income), and avoid taxation of Social Security benefits.
If you want to retire before age 65, your 457(b) becomes especially valuable:
Ages 55–65: Use 457(b) withdrawals (no penalty) to bridge income until you can access other retirement accounts and Medicare.
Age 62: Earliest you can claim Social Security (though waiting longer increases your benefit).
Age 65: Medicare eligibility begins, reducing healthcare costs.
Age 73: RMDs begin on traditional retirement accounts.
When Professional Help Makes Sense
The decisions you make about your 457(b) and overall retirement strategy can significantly impact your financial security. Consider working with a fiduciary financial advisor if you:
Are planning to retire in the near future
Need help coordinating 457(b), ASRS, and Social Security strategies
Have multiple retirement accounts and need a distribution strategy that works for you
Want to optimize your taxes in retirement
Want to retire early and need to a plan to bridge your income
What to Look for in an Advisor
Fee-only and fiduciary: Fee-only advisors work for you, not commission-based product sales. Fiduciary advisors are legally obligated to prioritize your best interests and reveal any conflicts of interest they may have.
Experience with public employees: Understanding ASRS and 457(b) rules is essential.
Comprehensive planning: Look for advisors who consider all aspects of your financial life, not just investments.
Maximize Your Arizona State Employee Retirement Benefits
Your ASRS pension provides a strong foundation, but AZ Smart Save gives you the tools to build a truly secure retirement. By contributing to your 457(b), choosing the right mix of traditional and Roth contributions, and investing appropriately for your age and risk tolerance, you can create the retirement lifestyle you want.
The key is to start now. Even small contributions today can grow into substantial savings over a career.
Get Expert Help with Your Arizona Retirement Strategy
At TrueWealth Financial Partners, we specialize in helping Arizona state employees like you maximize their retirement benefits. As fee-only fiduciary advisors, we provide objective guidance on:
457(b) contribution strategies for your situation
Investment allocation for your timeline
Coordinating ASRS, 457(b), and Social Security for more income in retirement
Tax-efficient withdrawal strategies
Early retirement planning using 457(b) advantages
Your retirement is too important to leave to chance. Schedule a free consultation today to create a comprehensive retirement plan that works for you.
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Arizona State 457(b) FAQs
What happens to my 457(b) if I leave state employment before retirement?
You have a few options when separating from Arizona state employment:
Leave the money in your AZ Smart Save account, where it can continue to grow.
Roll it over to an IRA or your new employer's retirement plan (401(k), 403(b), or another 457(b)).
Take a distribution (subject to income taxes).
Because there's no early withdrawal penalty with a 457(b) after separation from service, you can access the money at any age without the 10% penalty that applies to 401(k)s and IRAs before age 59½.
Can I roll my 457(b) into a Roth IRA?
Yes, you can convert your 457(b) to a Roth IRA, but this is considered a "Roth conversion," and the amount you convert will be treated as taxable income in the year you do it. This can be a smart strategy if you're in a low-income year (like early retirement before claiming Social Security) and want to convert money while in a lower tax bracket. You'll pay taxes now but get tax-free withdrawals later.
What's the difference between governmental and non-governmental 457(b) plans?
AZ Smart Save is a governmental 457(b), which is generally better than nongovernmental plans.
Governmental plans hold assets in a trust that can't be claimed by your employer's creditors, can be rolled over to IRAs and other retirement accounts, and offer more flexibility.
Nongovernmental 457(b) plans (offered by some nonprofits) keep assets with the employer and subject to creditor claims, cannot be rolled over, and often have more restrictive distribution rules.
As a state employee, you have access to the safer governmental plan.
Are there penalties for taking money out of my 457(b) while still employed?
Yes, in most cases. Unless you qualify for an unforeseeable emergency withdrawal (which has strict requirements and needs documentation), you cannot take distributions from your 457(b) while still employed with the state. This is different from after you separate from service, when you can access the money penalty-free at any age.
Can I contribute to both a 457(b) and a 403(b) in the same year?
Yes! This is one of the unique advantages for some public employees. The contribution limits are separate, so if you're a university employee with access to both plans, you could theoretically contribute $23,500 to your 457(b) AND $23,500 to your 403(b) in the same year, for a total of $47,000 in tax-advantaged savings (plus catch-up contributions if eligible).
What happens to my 457(b) if I die before retirement?
Your designated beneficiary will receive the full account balance. They can typically choose to take a lump-sum distribution or roll it over to an inherited IRA. It's critical that you designate beneficiaries in your Nationwide account. If you don't, the distribution will follow your plan's default order (usually spouse, then children, then estate), which can delay the process and create complications.
Can I change my contribution amount or investment choices after I enroll?
You can change your contribution percentage, switch between traditional and Roth contributions, and adjust your investment allocations at any time by logging into your Nationwide account online or calling their customer service. There are no penalties for making these changes, giving you flexibility as your financial situation evolves.