Are 457 Plan Contributions Tax Deductible and Why

Contributions to a 457 plan are indeed tax deductible, but only up to a certain point.

You can deduct contributions you make to a 457 plan, but only to the extent of your includible compensation. In other words, if you only contribute a small portion of your income to the plan, you can only deduct that small portion.

The deductibility of 457 plan contributions is based on your includible compensation, which is your total compensation minus any elective deferrals you made to a 403(b) plan, a 401(k) plan, or a Thrift Savings Plan.

A 457 plan is a voluntary, deferred compensation plan open to all State employees.

It gives employees the opportunity to save for retirement, supplementing their mandatory retirement plan.

Contributions are tax-advantaged, meaning they offer a way to save for the future while reducing taxes.

Employees can choose how much to contribute and whether to contribute on a pre-tax basis, on an after-tax basis (Roth), or with a combination of the two methods.

Contributions are vested immediately and are deducted directly from the employee's paycheck.

The 457 plan is administered by Empower, and for more information, you can visit CTDCP.com.

457 Plan Contributions are subject to an annual limit, which is the lesser of $23,000 or 100% of the participant's includible compensation.

The annual limit applies to both pre-tax employee contributions and after-tax designated Roth contributions. This means that you can contribute up to $23,000 of your pre-tax income to a 457 plan in a year, or up to 100% of your income if that's less than $23,000.

Employee contributions are always vested, meaning you own them immediately. However, employer contributions that are not vested when they're made do not count towards the annual limit.

Here's a summary of the contribution limits:

A 457(b) plan can be a great alternative to a 401(k) plan, but it's not necessarily better. Contributions made to a 457(b) plan may not be matched by the employer like a 401(k) plan.

One key difference between the two plans is that a 457(b) plan allows workers to lower taxable income and invest in retirement savings, similar to a 401(k) plan. However, the employer matching aspect is a significant consideration for many people.

In general, a 457(b) plan is designed for government employees and certain tax-exempt organizations, while a 401(k) plan is available to most employers.

The 457 Annual Contribution Limit is a crucial aspect to understand when it comes to contributing to a 457 plan. The annual limit on contributions under Internal Revenue Code Section 457(b)(2) is $23,000 for 2024, as indexed annually by the Internal Revenue Service for cost-of-living adjustments in $500 increments.

This limit applies to the total of all employee contributions made in a taxable year and employer contributions that are 100% vested in that taxable year in a 457(b) participant's account. It's essential to note that this annual limit is an individual limit and must take into account all annual vested contributions allocated to the individual's account under all 457(b) plans the individual has participated in during the taxable year.

A participant is always vested in employee contributions made to the 457(b) plan, which means those contributions are immediately available for retirement. Employer contributions that are not vested, however, do not count toward the 457 annual contribution limit in effect in the taxable year of contribution.

Here's a breakdown of the key factors to consider when it comes to the 457 annual contribution limit:

Contributions to a 457 plan can be tax deductible, which means you can lower your taxable income. This is a key benefit of a 457 plan, similar to a 401(k) plan.

A 457 plan compares to a 401(k) plan in terms of tax deductibility. Both types of plans allow workers to lower their taxable income by contributing to retirement savings.

Contributions made to a 457 plan may not be matched by the employer, unlike a 401(k) plan. This is a key difference between the two types of plans.

By contributing to a 457 plan, you can reduce your taxable income and lower your tax bill. This can help you save money and achieve your long-term financial goals.