Understanding 457 Plan Limits and Contributions

A 457 plan has a maximum annual contribution limit, which is $19,500 in 2022, plus an additional $6,500 if you're 50 or older, making it a great option for those who want to save more for retirement.

The annual contribution limit for a 457 plan is lower than that of a 401(k) or 403(b) plan, but it's still a significant amount that can add up over time.

To contribute to a 457 plan, you must be part of a qualified government or tax-exempt organization, and contributions are made on a pre-tax basis, reducing your taxable income for the year.

Contributions to a 457 plan are made on an after-tax basis, which means you've already paid income tax on the money you're contributing.

457(b) plans are limited to some group of more highly compensated employees, according to the Employee Retirement Income Security Act (ERISA) legislation.

This limitation is not specified by ERISA, but it must be according to some ascertainable standard that the employer sets.

The highly compensated limit is the same as for 401(k) discrimination testing, which was $125,000 a year for the preceding year of 2019 and $130,000 for the preceding year of 2020 or 2021.

Restricting the plan to some class of employees, such as directors or officers, is also an acceptable limitation.

These plans are occasionally referred to as "top hat" plans due to this limitation to higher-compensation employees.

There are two types of 457 plans: one for state and local government employees, and another for top-level executives at non-profits.

A 457(b) plan is specifically designed for state and local government employees, while a 457(f) plan is tailored for top-level executives at non-profits.

The IRS adjusts contribution and deduction limits annually to account for inflation through cost of living adjustments (COLAs).

Eligible plans for 457(b) plans are limited to some group of more highly compensated employees, as specified by the Employee Retirement Income Security Act (ERISA).

The level of compensation required is not specified by ERISA, but it must be according to some ascertainable standard set by the employer.

The highly compensated limit is $125,000 a year for the preceding year of 2019 and $130,000 for the preceding year of 2020 or 2021, which is the same as for 401(k) discrimination testing.

Restricting the plan to some class of employees such as directors or officers is also an acceptable limitation.

457(b) plans are occasionally referred to as "top hat" plans due to this limitation to higher-compensation employees.

Nongovernmental 457 plans have some key differences from governmental ones. These plans are restricted and can't be rolled into other tax-deferred retirement plans, unlike governmental plans.

One major restriction is that money deferred into nongovernmental 457 plans can only be rolled into another nongovernmental 457 plan. It can't be rolled into a governmental plan or any other type of tax-deferred retirement plan.

Nongovernmental 457 plans also have a unique characteristic: the money in these plans remains the property of the employer, not the employee. This means that the Internal Revenue Code considers it taxable only at the time of distribution, for specific situations allowed by the original plan or in cases of emergency cash withdrawals.

Nongovernmental 457 plans are limited to highly compensated employees, as per the Employee Retirement Income Security Act (ERISA). The level of compensation required is not specified by ERISA, but it must be according to some ascertainable standard set by the employer.

Here are some key differences between nongovernmental and governmental 457 plans:

457(b) plans are unique in that they're tax-advantaged, employer-sponsored retirement plans offered to government employees and certain tax-exempt organizations.

There are two main categories of 457(b) plans: governmental and non-governmental, depending on whether you work for the government or not.

457(b) plans have features that set them apart from 401(k)s and 403(b)s, offering more flexibility in some ways.

One of the key benefits of 457(b) plans is that they allow for flexible withdrawal rules, which can be attractive to some savers.

Here are the main types of 457(b) plans:

While 401(k)s and 403(b)s get a lot of attention, 457(b) plans are worth considering if your employer offers one, due to their unique features and flexibility.

With a 457 plan, you can withdraw funds at any time penalty-free as long as you're no longer employed by the plan sponsor—or if the plan sponsor stops offering the plan. This is a major perk, but it's essential to consider your options carefully before withdrawing, as it can significantly increase your tax liability.

Withdrawals from a 457 plan are subject to income tax and wage tax, meaning they must be reported as taxable income on that year's tax return. You'll want to plan ahead to avoid a tricky financial situation come tax time.

You might be able to qualify for an unforeseeable emergency distribution, which allows you to withdraw funds early penalty-free while still being employed by the plan sponsor. These distributions are typically allowed for events beyond your control, such as an illness, accident, or natural disaster, and you've exhausted other financial options.

Deferrals can be a powerful tool for saving for retirement, and understanding how they work is key to making the most of them.

If you're within 3 years of your plan's normal retirement age, your 457(b) plan might allow you to contribute up to double the annual limit.

You can also contribute the annual 457(b) limit, plus any amount of unused contribution limit from prior years, if you're not already making the catch-up contributions for being 50 or older.

However, if your plan allows for age-50 catch-up contributions and the 3-year catch-up contributions, you can only take advantage of the larger deferral, not both.

Consider reaching out to a tax or financial professional for help if you're unsure about how these rules apply to your situation.

You can withdraw from a 457(b) plan at any time penalty-free if you're no longer employed by the plan sponsor, or if the plan sponsor stops offering the plan.

Withdrawing from a 457(b) plan can increase your tax liability significantly, so it's essential to consider your options carefully before making a decision.

You might be able to qualify for an unforeseeable emergency distribution, which allows you to withdraw funds early penalty-free while still being employed by the plan sponsor, but these distributions can be complex and require professional guidance.

These distributions are typically allowed if you're impacted by an event beyond your control, such as an illness, accident, or natural disaster, and you've exhausted other financial options.

You must start taking required minimum distributions (RMDs) from your 457(b) on April 1 following the calendar year you turn 73, unless you're still working for the plan sponsor.

If you're still working for the plan sponsor, you're exempt from taking RMDs, which can be a significant relief.

If you're considering a 457 plan, it's worth comparing it to other plans like the 401(k) or the Thrift Savings Plan.

The 457 plan has a higher elective deferral limit of $19,500 in 2022, compared to the 401(k) limit of $19,000.

In contrast, the Thrift Savings Plan has a similar limit of $19,500.

The 457 plan also allows for catch-up contributions of $6,500 in 2022, which is the same as the 401(k) limit.

The Thrift Savings Plan, however, does not have a catch-up contribution limit.

Another key difference is that the 457 plan allows for Roth contributions, which the 401(k) does not.

If you have a 457(b) plan, you can contribute up to $23,000 in 2024 and $23,500 in 2025.

You can also contribute an additional $7,500 in 2024 and 2025 in catch-up contributions if you’re 50 or older, and the catch-up limit for 457 plan participants increased for those aged 60 to 63 to $11,250 in 2025.

For 457(b) plans, you may be able to contribute as much as twice the limit if you're within three years of normal retirement age, which is $46,000 for 2024 and $47,000 for 2025.

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) made some significant changes to governmental 457 plans. This change removed the coordination of benefits limitation, which previously restricted how much you could contribute to both a 401(k) or 403(b) and a 457 plan.

As a result, you can now defer the maximum contribution amounts to both plans, allowing you to contribute the maximum $19,500 for 2021 into your 401(k) and also the maximum $19,500 into your 457 plan. If you're at least 50 at the end of the current tax year, you can contribute an additional $6,500 into each plan.

The total combined annual contribution to 401(k) and 403(b) plans is still subject to the $19,500 limit and $6,500 catch-up limit. This means you can't contribute more than $26,000 per year to these types of plans, but you can still contribute the maximum to your 457 plan.

A 457(f) plan is a type of deferred-compensation plan that allows nonprofit organizations to offer tax-deferred benefits to their executives. This plan is designed to attract top talent from the private sector, where pay and benefits tend to be higher.

The deferred compensation under a 457(f) plan is subject to a substantial risk of forfeiture, which means executives risk losing the benefit if they fail to meet specific requirements for length of service and performance. This risk of forfeiture is a key feature of 457(f) plans.

The deferred compensation is not yet paid and is sheltered from taxation, remaining in the hands of the employer until the risk of forfeiture is gone. At that point, the compensation becomes taxable as gross income.

Executives must perform services for at least two years to receive benefits under a 457(f) plan. This requirement is part of the substantial risk of forfeiture that comes with these plans.

In 2004, Congress added Section 409A to the tax code in response to executive bonus plans given to key employees at Enron, which allowed them early access to their deferred compensation if financial conditions of the employer deteriorated.

457 plan participants can double their contributions if they're within three years of normal retirement age, allowing them to save more for their future.

Catch-up contributions are also allowed after age 50, giving participants a chance to boost their savings even further.

You can roll a 457(b) account into a Roth IRA or 401(k), providing flexibility for your retirement savings.

Here are some key benefits and drawbacks of the 457 plan:

The contribution that your employer matches will count as part of your maximum contribution, which may affect your overall savings.

Contributing too much to a 457(b) can lead to tax penalties.

If you go over the contribution limit, you might be on the hook for tax penalties, which can be a costly mistake.

Those penalties can be particularly steep if you don't remove excess contributions by the tax return deadline of the next year, usually April 15th.

Double taxation is a real risk if you don't take action, with those dollars being taxed once for the year you or your employer contributed, and again when you take the distribution.

If you're close to retirement age, you can double your 457(b) contributions. This is a big advantage for those nearing the end of their working years.

Catch-up contributions are allowed after age 50, which can help you save even more for retirement.

You can roll a 457(b) account into a Roth IRA or 401(k), giving you more flexibility with your retirement savings.

However, few government employers provide matching programs within the 457(b) plan, so you may not get the same employer match as you would with a 401(k).

Here are some key details to keep in mind:

The 457(f) plan has a two-year vesting period, so if you leave your job early, you'll forfeit your right to the plan.

In Alabama, the 457 plan limit for catch-up contributions is $6,500 in 2022.

The annual deferral limit for 457 plans in Alabama is $19,500 in 2022.

In Alaska, the 457 plan limit for catch-up contributions is $6,500 in 2022.

Arizona allows 457 plan participants to make catch-up contributions of up to $6,500 in 2022.

In Arkansas, the annual deferral limit for 457 plans is $19,500 in 2022.

California 457 plan participants can make catch-up contributions of up to $6,500 in 2022.

Colorado 457 plan participants can make catch-up contributions of up to $6,500 in 2022.

Connecticut 457 plan participants can make catch-up contributions of up to $6,500 in 2022.

Delaware 457 plan participants can make catch-up contributions of up to $6,500 in 2022.

In Florida, the annual deferral limit for 457 plans is $19,500 in 2022.

Georgia 457 plan participants can make catch-up contributions of up to $6,500 in 2022.

Hawaii 457 plan participants can make catch-up contributions of up to $6,500 in 2022.

Idaho 457 plan participants can make catch-up contributions of up to $6,500 in 2022.

Illinois 457 plan participants can make catch-up contributions of up to $6,500 in 2022.

Indiana 457 plan participants can make catch-up contributions of up to $6,500 in 2022.

Iowa 457 plan participants can make catch-up contributions of up to $6,500 in 2022.

Kansas 457 plan participants can make catch-up contributions of up to $6,500 in 2022.

Kentucky 457 plan participants can make catch-up contributions of up to $6,500 in 2022.

Louisiana 457 plan participants can make catch-up contributions of up to $6,500 in 2022.

Maine 457 plan participants can make catch-up contributions of up to $6,500 in 2022.

Maryland 457 plan participants can make catch-up contributions of up to $6,500 in 2022.

Massachusetts 457 plan participants can make catch-up contributions of up to $6,500 in 2022.

Michigan 457 plan participants can make catch-up contributions of up to $6,500 in 2022.

Minnesota 457 plan participants can make catch-up contributions of up to $6,500 in 2022.

Mississippi 457 plan participants can make catch-up contributions of up to $6,500 in 2022.

Missouri 457 plan participants can make catch-up contributions of up to $6,500 in 2022.

Montana 457 plan participants can make catch-up contributions of up to $6,500 in 2022.

Nebraska 457 plan participants can make catch-up contributions of up to $6,500 in 2022.

Nevada 457 plan participants can make catch-up contributions of up to $6,500 in 2022.

New Hampshire 457 plan participants can make catch-up contributions of up to $6,500 in 2022.

New Jersey 457 plan participants can make catch-up contributions of up to $6,500 in 2022.

New Mexico 457 plan participants can make catch-up contributions of up to $6,500 in 2022.

New York 457 plan participants can make catch-up contributions of up to $6,500 in 2022.

North Carolina 457 plan participants can make catch-up contributions of up to $6,500 in 2022.

North Dakota 457 plan participants can make catch-up contributions of up to $6,500 in 2022.

Ohio 457 plan participants can make catch-up contributions of up to $6,500 in 2022.

Oklahoma 457 plan participants can make catch-up contributions of up to $6,500 in 2022.

Oregon 457 plan participants can make catch-up contributions of up to $6,500 in 2022.

Pennsylvania 457 plan participants can make catch-up contributions of up to $6,500 in 2022.

Rhode Island 457 plan participants can make catch-up contributions of up to $6,500 in 2022.

South Carolina 457 plan participants can make catch-up contributions of up to $6,500 in 2022.

South Dakota 457 plan participants can make catch-up contributions of up to $6,500 in 2022.

Tennessee 457 plan participants can make catch-up contributions of up to $6,500 in 2022.

Texas 457 plan