457b Plan Explained: A Comprehensive Overview of 457b Plans

A 457b plan is a type of deferred compensation plan that allows you to save for retirement on a tax-deferred basis. You can contribute to a 457b plan if you work for a state or local government, a tax-exempt organization, or a certain type of 501(c)(9) organization.

Contributions to a 457b plan can be made on a pre-tax basis, reducing your taxable income for the year. This can be especially beneficial if you're in a high tax bracket.

You can contribute a certain percentage of your income to a 457b plan, up to a maximum annual limit. For example, in 2022, the maximum annual contribution limit is $19,500, plus an additional $6,500 if you're 50 or older.

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A 457 plan is a tax-deferred retirement savings plan that lets you make contributions before taxes, allowing your money to grow tax-deferred.

You need to be an employee of a government entity, like a state or local government, to be eligible for a 457 plan. This might also include police officers or firefighters employed by a government.

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Pre-tax contributions to a 457 plan reduce your taxable income for the year, which can be an advantage if you end up in a lower tax bracket during retirement.

Funds are withdrawn from your income without being taxed and are only taxed upon withdrawal, which is typically at retirement, after the funds have had several years to grow.

You don't end up with an early withdrawal penalty if you leave your job and need to take distributions from a 457 plan, unlike many other tax-deferred retirement plans.

Contributions are made to an account in your name for the exclusive benefit of you and your beneficiaries, and the value of the account is based on the contributions made and the investment performance over time.

Employees can make after-tax Roth contributions, which allow for potentially tax-free withdrawals, in some 457 plans.

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You can contribute to a 457(b) plan at any time prior to the date your compensation becomes available. This is a change from previous rules.

The maximum amount you can contribute is based on your taxable compensation as defined by the Internal Revenue Code. Generally, you can contribute up to 100% of your salary on a pretax basis.

Special catch-up provisions may be available, so it's a good idea to talk to your financial professional for more information. They can help you understand your options and make the most of your contributions.

You can stop, increase, or decrease your contributions by giving notice to your employer. Your employer will make the changes as soon as administratively feasible after receiving your request.

You are always 100% vested in employee contributions and rollover contributions, plus any earnings they generate.

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Vesting is an important concept in your 457b plan. You are always 100% vested in employee contributions.

In other words, you own the money you contribute to your 457b plan from day one. This means you can take the money out if you leave your job or retire.

You are also 100% vested in rollover contributions, plus any earnings they generate. This includes any interest or investment gains your contributions earn over time.

This vesting rule applies to all contributions you make to your 457b plan, giving you full ownership and control over your retirement savings.

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Withdrawals from a 457(b) plan are allowed in certain events, including death, disability, severance from employment, retirement, and unforeseeable emergencies. These events can be a result of a severe financial hardship, a sudden and unexpected illness or accident, or a loss of property due to casualty.

You can also withdraw money from your 457(b) plan if you're 59½ or older, or if your account balance is $5,000 or less and you haven't made deferrals in the past two years and haven't taken prior withdrawals of this type.

Here are the events that allow withdrawals from a 457(b) plan:

Income taxes are payable upon withdrawal and federal restrictions apply to early withdrawals. Be sure to talk with your tax advisor before withdrawing any money from your 457(b) plan account.

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You can withdraw money from the Plan in various situations, including death, disability, severance from employment, retirement, or if you reach age 59½ or older.

Money can be withdrawn due to unforeseeable emergencies, such as a severe financial hardship resulting from a sudden and unexpected illness or accident.

A one-time withdrawal is allowed if your account balance is $5,000 or less and there have been no deferrals for the past two years and no prior withdrawals of this type have been taken.

Withdrawals are generally taxable, and federal restrictions apply to early withdrawals. Be sure to talk with your tax advisor before withdrawing any money from your Plan account.

You can also take a loan from your account, but the amount is limited to the lesser of 100% of your vested account balance up to $10,000, or 50% of your vested account balance for loans in excess of $10,000, not to exceed $50,000.

The minimum loan amount is $1,000, and all loans must be repaid within five years. A longer term may be available if the loan is to be used to purchase your principal residence.

Here are the loan details:

Unpaid loan amounts will be taxed as ordinary income.

You can contribute a lot to your 457(b) plan, especially if you're close to retirement age. Up to $23,000 can be contributed in 2024, and $23,500 in 2025.

Catch-up contributions are available if you're 50 or older, adding an extra $7,500 to your contribution limit in both 2024 and 2025.

For those aged 60 to 63, the catch-up limit increased to $11,250 in 2025 due to the SECURE Act 2.0.

You may be able to contribute even more if you're within three years of normal retirement age, with a limit of $46,000 in 2024 or $47,000 in 2025.

Your maximum contribution in this scenario is the lesser of twice the contribution limit or the annual limit plus the unused annual limit from prior years.

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You can borrow money from your 457(b) plan, but there are some rules to keep in mind. The maximum amount you can loan is the lesser of 100% of your vested account balance up to $10,000, or 50% of your vested account balance for loans in excess of $10,000, not to exceed $50,000.

You can have two loans outstanding at a time: one general purpose loan and one mortgage loan. The minimum loan amount is $1,000, and you'll need to repay the loan within five years, unless it's used to buy your primary residence.

Here are the loan details:

Remember, unpaid loan amounts will be taxed as ordinary income.

Loans from your plan can be a helpful way to get some extra cash when you need it. You can borrow up to the lesser of 100% of your vested account balance up to $10,000, or 50% of your vested account balance for loans in excess of $10,000, not to exceed $50,000.

The minimum loan amount is $1,000, which is a relatively small amount compared to other loan options. You can have two loans outstanding at a time: one general purpose loan and one mortgage loan.

All loans must be repaid within five years, unless you're using the loan to purchase your principal residence, in which case a longer term may be available. You pay interest back to your account, and the interest rate on your loan will be the Prime Rate plus 1%.

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You'll also be charged a $50 processing fee for all new loans and a $25.00 per year loan maintenance fee, which will be deducted from your account. Unpaid loan amounts will be taxed as ordinary income, so be sure to make your payments on time.

Here's a summary of the loan limits:

To be eligible for a loan, you must be currently employed by the State or a participating employer, or on an approved leave of absence.

You can take a loan from your 457(b) plan if you're currently employed by the State or a participating employer, or if you're on an approved leave of absence. The loan amount is limited to the lesser of 100% of your vested account balance up to $10,000, or 50% of your vested account balance for loans in excess of $10,000, not to exceed $50,000.

The minimum loan amount is $1,000, and you can have two loans outstanding at a time: one general purpose loan and one mortgage loan. You pay interest back to your account, with an interest rate of the Prime Rate plus 1%.

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Here are the loan repayment terms:

A $50 processing fee for all new loans and a $25.00 per year loan maintenance fee are charged to your account. Unpaid loan amounts will be taxed as ordinary income.

In case of an unforeseeable emergency, such as a severe financial hardship resulting from a sudden and unexpected illness or accident, you may be able to withdraw money from your 457(b) plan. This type of withdrawal is subject to certain rules and restrictions.

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