Harness Money

What is a 457?

A 457 plan, also known as a deferred compensation plan or a 457(b) plan, is a type of retirement savings plan available to certain employees of state and local governments, as well as some non-profit organizations. It is similar to a 401(k) or 403(b) plan but with specific eligibility requirements and features. Here are some key points about 457 plans:

1. Purpose: The primary purpose of a 457 plan is to help employees of eligible employers save for retirement by offering a tax-advantaged investment vehicle. It allows employees to contribute a portion of their salary to the plan on a pre-tax or after-tax basis, depending on the specific plan features.
2. Eligible Employers: 457 plans are typically available to employees of state and local governments, including police officers, firefighters, teachers, and other government workers. They are also offered to employees of certain non-profit organizations that meet specific IRS criteria.
3. Contributions: Employees contribute to a 457 plan through salary deferrals, where a portion of their salary is deducted from their paycheck and deposited into the plan. The contributions can be made on a pre-tax basis, reducing the employee’s taxable income in the year of contribution. Some plans also offer after-tax (Roth) contribution options.
4. Employer Contributions: In some cases, employers may make contributions to the employee’s 457 plan as part of their retirement benefits package. These contributions can be discretionary or subject to certain employer matching formulas, similar to other employer-sponsored retirement plans.
5. Contribution Limits: The IRS sets annual contribution limits for 457 plans, which are separate from the limits for other retirement plans like 401(k) or 403(b) plans. The limits apply to the total contributions made by the employee and the employer combined. The limits are subject to periodic adjustments, so it’s important to check the current limits with the plan administrator or the IRS.
6. Tax-Deferred Growth: Similar to other retirement plans, the investment earnings within a 457 plan accumulate on a tax-deferred basis. This means that taxes on the contributions and investment gains are deferred until withdrawals are made in retirement.
7. Withdrawals and Distributions: Withdrawals from a 457 plan are generally not allowed until the employee separates from service or reaches age 59½, except in certain specific circumstances, such as disability or unforeseeable emergencies. Withdrawals are typically subject to income taxes at the individual’s applicable tax rate at the time of distribution.
8. Rollovers and Transfers: Employees who change jobs or retire may have the option to roll over their 457 plan account balance into another eligible retirement plan, such as an IRA or a new employer’s retirement plan. This allows for continued tax-deferred growth and consolidation of retirement savings.
9. Catch-Up Contributions: Some 457 plans offer catch-up contributions for employees who are within a certain number of years of their normal retirement age and have not contributed the maximum allowed in previous years. These catch-up contributions allow employees to potentially save more for retirement as they approach retirement age.
10. Deferred Compensation: The term “deferred compensation” refers to the fact that the contributions to a 457 plan are set aside or deferred from the employee’s current income until a future date when the funds are withdrawn or distributed.

It’s important for employees to review and understand the specific features, investment options, and contribution limits of their 457 plan. Consulting with a financial advisor or contacting the plan administrator can provide further guidance on maximizing the benefits of a 457 plan and making informed retirement savings decisions.