Unlocking the Benefits of 457 Plan for Your Future

A 457 plan is a type of deferred compensation plan that offers a range of benefits for your future.

Contributions to a 457 plan are made with pre-tax dollars, reducing your taxable income and lowering your tax bill. This can be especially beneficial for high-income earners who want to minimize their tax liability.

One of the key benefits of a 457 plan is the flexibility it offers in terms of investment options. You can choose from a variety of investment portfolios, allowing you to tailor your plan to your individual financial goals and risk tolerance.

By contributing to a 457 plan, you can potentially reduce your taxes and increase your retirement savings.

A 457 plan is a type of tax-advantaged retirement savings account offered by certain state and local governments and tax-exempt organizations to their employees.

There are two types of 457 plans: governmental and non-governmental. Governmental 457(b) plans are sponsored by a government entity and are backed by the entity itself, while non-governmental 457(b) plans are backed by the offering company.

Governmental 457(b) plans offer a level of protection for your funds, as they are held in a trust and cannot be claimed by your employer's creditors. In contrast, non-governmental 457(b) plans are owned by the employer and may be at risk if the employer runs into financial trouble.

Here are the key differences between governmental and non-governmental 457(b) plans:

457 plans can be offered by various types of organizations, including state and local governments, public schools, and tax-exempt organizations.

A 457 plan is a type of tax-advantaged retirement savings account offered by certain state and local governments and tax-exempt organizations.

There are two main types of 457 plans: governmental 457(b) plans and non-governmental 457(b) plans. Governmental 457(b) plans are sponsored by a government entity and offer more benefits, such as protection from creditors and the ability to roll over funds into other retirement accounts.

In a governmental 457(b) plan, you contribute pre-tax dollars and the money is held in a trust, which means it can't be claimed by your employer's creditors. This is a key benefit, as it gives you peace of mind knowing your retirement savings are protected.

Non-governmental 457(b) plans, on the other hand, are backed by the offering company and offer fewer benefits. With a non-governmental plan, the employer owns the account, which means your funds could be at risk if the employer runs into trouble with creditors.

457 plans can be offered by various types of organizations, including state and local governments, public schools, and tax-exempt organizations. Here's a breakdown of the two main categories:

It's worth noting that 457 plans have different rules and provisions compared to other types of retirement plans, such as 401(k)s. For example, contributions made to a 457(b) may not be matched by the employer.

A 457 plan is similar to a 401(k) in how it allows you to put away money into a special retirement account that provides tax advantages. You can only defer a certain dollar amount each year, and the amount you can defer is linked to the cost-of-living indexes, just like a 401(k).

The employee contribution limit for 2024 is $23,000 for workers under age 50, which is the same as the 401(k) contribution limit. This limit applies to contributions from both the employee and the employer in governmental 457(b) plans.

You can contribute a percentage of your income up to the annual contribution limit, and the dollars you contribute and the earnings on those dollars belong to you. Your employer must keep these assets separate from their own and cannot use them for any other purpose.

The Roth 457(b) plan allows you to put in money after-tax, paying taxes on the contributions today, but you won't have to pay tax on withdrawals at retirement. This is in contrast to the pre-tax 457(b) plan, which allows you to contribute money and take a tax deduction today, but you'll pay taxes when you take money out of the account at retirement.

The dollars your employer contributes, and the earnings on those dollars, must be kept separate for your benefit, but you may forfeit these assets if you leave your employer before they're vested. Vesting schedules are defined by each plan, so it's essential to understand how your plan works.

Employer contributions are a key factor in retirement savings, and 401(k) plans often offer matching benefits, with nearly 80% of participants receiving some form of employer contribution.

Employer contributions to 457(b)s are less common, and the total amount that can be saved in the plan yearly is lower due to the absence of a separate employer contribution limit.

Investment options are often more limited in 457(b)s than 401(k)s, making it tougher to diversify your savings according to your risk tolerance and financial goals.

You can start investing for retirement at any age, and a small amount now can make a big difference tomorrow.

Here's a comparison of the contribution limits for 401(k)s and 457(b)s:

It's essential to understand the rules around withdrawing funds from a Governmental 457(b) plan, as you may only take a distribution when a specific triggering event occurs, such as separation from service or attainment of age 70½.

You may be able to take a distribution for unforeseeable emergencies, once you're 59½ or older, or for a qualified birth or adoption.

Fees for 457(b) plans can be higher due to factors like the size of the plan and the plan administrator. Larger plans have more leverage to negotiate fees, while smaller plans may have higher fees due to the need for a higher profit margin.

Some 457(b) plans offer more competitive fee structures than 401(k) plans, but it ultimately depends on the plan administrator and their fiduciary responsibilities. A good plan administrator can make a difference in the fees you pay.

Here are some key differences in fees and withdrawals between 457(b) and other plans:

In terms of withdrawals, you can take a distribution from a Governmental 457(b) plan in certain circumstances, such as separation from service, attainment of age 70½, or plan termination. You may also be able to take a distribution for unforeseeable emergencies or once you're 59½ or older.

Government employers often don't offer matching funds to encourage participation in 457(b) plans, which can lead to higher fees for participants.

Fees can be driven up by on-site education representatives who visit employees to enroll them in the plan.

Larger 457(b) plans have more leverage to negotiate lower fees, similar to corporate 401(k) plans.

Small plans may have higher fees because providers need a larger profit margin to service them.

The plan administrator can also impact fees, with some offering more competitive fee structures than others.

Withdrawals from a Governmental 457(b) plan are taxed differently depending on the type of money in the plan.

Distributions from a Governmental 457(b) plan are not subject to an early withdrawal penalty, regardless of your age.

If you have pretax money in your plan and take a distribution, it will be taxed as ordinary income.

On the other hand, qualified distributions of Roth contributions and earnings can be taken tax-free.

Here's a breakdown of how different types of distributions are taxed:

A 457 plan is often compared to other popular retirement plans, such as 401(k) plans. Both 457 and 401(k) plans have the same maximum annual deferral limit of $23,500, and both allow for an additional catch-up contribution of $7,500 for employees aged 50.

However, 457 plans have a unique catch-up feature that allows employees to contribute up to the annual maximum deferral limit in the three years before their normal retirement age. This can be a significant advantage for those who are nearing retirement.

One key difference between 457 and 401(k) plans is that 457 plans are typically offered to public service employers and their employees, while 401(k) plans are offered to private sector employers and their employees. 457 plans are also less likely to have employer matching contributions.

Here's a comparison of the key features of 457 and 401(k) plans:

It's worth noting that 457 plans also have a unique feature called a Pre-Retirement Catch-Up, which allows employees to contribute up to the annual maximum deferral limit in the three years before their normal retirement age. This can be a significant advantage for those who are nearing retirement and want to maximize their retirement savings.

You can contribute up to 100% of your includable compensation or the annual contribution limit, whichever is less, to your Governmental 457(b) plan. The annual contribution limit for 2025 is $23,500.

If you're 50 or older, you can contribute an additional $7,500 for a total of $31,000 in 2025. Alternatively, if you're in the last three years prior to normal retirement age, you can contribute up to two times the annual contribution limit ($47,000 in 2025).

Your employer's contributions count toward your contribution limit. For example, if your employer contributes $5,000, the maximum amount you can contribute in 2025 is $18,500 (plus catch-up contributions if eligible).

Here are the catch-up contribution limits for Governmental 457(b) plans:

Keep in mind that you cannot use both catch-up options in the same year – you get the higher of the two.

You can contribute up to 100% of your includable compensation or the annual contribution limit, whichever is less, to your Governmental 457(b) plan. The annual contribution limit for 2025 is $23,500.

Eligible participants can take advantage of catch-up contributions, which increase the contribution limit. There are two types of catch-up contributions: age-based and service-based.

Age-based catch-up contributions allow participants 50 or older to contribute an additional $7,500 for a total of $31,000 in 2025. This is a significant increase, making it a great option for those nearing retirement.

Service-based catch-up contributions are available to participants in the last three years prior to normal retirement age. This type of catch-up contribution allows participants to contribute up to two times the annual contribution limit, which is $47,000 in 2025.

Keep in mind that your employer's contributions count toward your contribution limit. For example, if your employer contributes $5,000, the maximum amount you can contribute in 2025 is $18,500 (plus catch-up contributions if eligible).

Here's a summary of the catch-up contribution options:

Remember, if your plan offers both catch-up options, you can't use both in the same year – you get the higher of the two.

You can withdraw funds from a Governmental 457(b) plan when a specific triggering event occurs, such as separation from service, attainment of age 70½, plan termination, or divorce with a qualified domestic relations order (QDRO).

Depending on the plan, you may also be able to take a distribution for unforeseeable emergencies, or once you're 59½ or older.

There are two types of 457(b) plans, each with different rules, and it's essential to note that we're covering Governmental 457(b) plans, not 457(f) plans.

You must begin taking required minimum distributions (RMDs) from your plan by April 1 following the year you turn age 73 and by December 31 each subsequent year.

RMDs are not required for your Roth 457(b), and some plans may allow you to delay RMDs until retirement.

Here are the common events that trigger a withdrawal from a Governmental 457(b) plan: