Governmental 457 B Plan: A Comprehensive Overview

A Governmental 457 B Plan is a type of deferred compensation plan offered by state and local governments, as well as tax-exempt organizations.

These plans allow employees to contribute a portion of their salary on a pre-tax basis, reducing their taxable income for the year.

Contributions are made with pre-tax dollars, which can lower the employee's tax liability and increase their take-home pay.

In return, the employee agrees to pay taxes on the funds when they are withdrawn in retirement or upon termination of employment.

The plan is designed to help employees save for retirement and other long-term goals, often with a focus on public sector employees who may not have access to traditional employer-matched retirement plans.

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

These plans are designed for eligible employees of state and local governments, such as firefighters, police officers, and civil servants, and employees of certain tax-exempt organizations.

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You can make pre-tax contributions to a 457(b) plan, allowing you to enjoy tax-deferred growth until you withdraw funds.

Only nonprofit and governmental organizations can offer 457 plans, though they can be used alongside other retirement accounts, including 401(k)s and 403(b)s.

A 457 plan is similar to a 401(k) in that you can make pre-tax contributions, but there are a few notable differences between these two savings plans and how they work.

Contributions are tax-deferred, meaning you pay taxes when you withdraw funds later.

It's part of the retirement plan family, and on the surface, think of it as a '401(k) for government and nonprofit employees'.

A 457(b) plan allows you to defer part of your income and use it to invest in annuities and mutual funds, and grow those.

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Governmental 457(b) plans are available to employees of state and local governments, as well as tax-exempt organizations.

In contrast to nongovernmental 457(b) plans, there is no requirement to limit eligibility to higher-compensation employees.

Contributions to a governmental 457(b) plan are largely made by the participant using paycheck deductions, but employers can also contribute funds.

The contribution limits are the same as for other employer plans, with a combined maximum contribution for 2025 of $47,000 if both a 457 plan and a 401(k) or 403(b) plan are available.

You can invest the maximum allowable contribution in both a 457 plan and a 401(k) or 403(b) plan, but the "final three year" and Age 50+ catch-up cannot be used in the same tax year.

Here's how the contribution limits have changed over the years:

For 457 plans, contributions are largely made by the participant using paycheck deductions, but employers can also contribute funds, with one set contribution limit across both buckets.

In 2024, the contribution limit is 100% of your salary or $23,000, whichever is less, for participants under 50, and $30,500 for participants 50 or older.

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Participants 50 or older can also make catch-up contributions of $7,500, bringing the total annual contribution to $30,500.

If you're within three years of retirement age, as specified by the plan, you can contribute up to $41,000 or the base limit ($23,000), plus the amount of your unused base limit in prior years, whichever is less.

Keep in mind that catch-up contributions for participants 50 or older are only allowed if you have a governmental 457(b), and if you're enrolled in a nonprofit 457(b), your limit will be $23,000.

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Investment options in a 457(b) plan are quite flexible. You can fund your plan with group fixed and variable annuities, which can provide a steady income stream.

Retail mutual funds are also an option, offering a way to diversify your investments and potentially grow your wealth over time. Bank instruments, such as CDs and bonds, can provide a low-risk option for those who want to preserve their capital.

You can also choose a combination of all three options, allowing you to tailor your investment strategy to your individual needs and goals.

Investment options for 457(b) plans are quite diverse. You can fund these plans with group fixed and variable annuities.

One popular option is to invest in retail mutual funds. Bank instruments are also a viable choice for funding a 457(b) plan.

Limited investment options can be a reality for some retirement savers. 457(b) plans tend to be more limited and may only provide access to certain annuities and mutual funds.

Some plans may offer a limited range of investment options, which can be a concern for those who want more control over their investments. 401(k)s typically offer a variety of investment options, but these can vary greatly from one plan to another.

It's worth noting that even with limited options, there may still be some flexibility within the plan. For example, some 457(b) plans may allow participants to take a loan from their account balance.

You can withdraw funds from a governmental 457(b) plan at any time penalty-free as long as you're no longer employed by the plan sponsor. This is a major advantage over other retirement plans.

If you're still working for the plan sponsor, you can withdraw funds penalty-free in the event of an unforeseeable emergency, such as an illness, accident, or natural disaster, and you've exhausted other financial options. These distributions can get tricky, so consider consulting with a financial or tax professional first.

Withdrawals from a 457(b) plan are subject to income tax and wage tax, meaning they must be reported as taxable income on that year's tax return. This can increase your tax liability significantly, so it's essential to plan correctly.

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. An exception: You don't need to take RMDs if you're still working for the plan sponsor.

Here are some key withdrawal rules to keep in mind:

It's essential to carefully consider your options before withdrawing from a 457(b) plan, as the tax implications can be significant. Consider consulting with a financial or tax professional to ensure you're making the best decision for your situation.

Contributing to a 457(b) plan reduces your taxable income today, which can help decrease your tax liability ahead of retirement.

You can tap into 457(b) funds without penalty if you part ways with your employer, either by retiring or changing jobs.

457(b) withdrawals are subject to income tax and wage tax, meaning they must be reported as taxable income on that year's tax return.

You can withdraw 457(b) funds penalty-free as long as you're no longer employed by the plan sponsor—or if the plan sponsor stops offering the plan.

You should seriously consider your options before withdrawing from a 457(b) plan, as the default withdrawal is a lump sum, which can increase your tax liability significantly.

You might be able to qualify for an unforeseeable emergency distribution, where you can withdraw funds early penalty-free while still being employed by the plan sponsor.

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.

Withdrawing from a 457(b) plan before age 73 can lead to significant tax implications, making it essential to plan carefully.

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Employer matching is not the norm for most 457(b) plans, unlike 401(k)s and 403(b)s.

This means you won't typically see your employer contributing a matching amount to your 457(b) plan.

Vesting Schedules May Apply

Vesting schedules may apply if your employer contributes to your 457(b) plan.

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Employer matching is rare, especially when it comes to 457(b) plans. These plans often don't offer employer matching, unlike 401(k)s and 403(b)s.

If your employer does match your contributions, the money they add will count towards your annual contribution limit.

Vesting schedules apply, which means you may have to stay with the organization for a certain amount of time before those funds truly become yours.

This can be a challenge for employees who are new to a company or who plan to leave soon. For example, if your employer contributes to your 457(b), vesting schedules may apply, requiring you to meet a specific time requirement before you can fully benefit from the contribution.

A governmental 457(b) plan can be used in tandem with other accounts like a 401(k) or IRA, allowing you to maximize your contributions.

You can choose both a 457 and another plan, which can be extremely helpful and valuable vehicles to allow for higher earners to further defer income toward retirement.

Withdrawals from a 401(k) or 403(b) before age 59½ typically trigger a 10 percent early withdrawal penalty, but not a 457(b) plan if you're no longer employed by the plan sponsor.

You'll still owe income tax on any withdrawals, but you won't face the 10% additional tax for early withdrawals that 403(b)s are subject to, except for distributions attributable to a rollover from another type of plan or IRA.

457(b) plans also allow catch-up contributions for those 50 and over, just like 401(k)s and 403(b)s, and beginning in 2025, a SECURE Act 2.0 special catch-up provision will increase the annual catch-up contribution limit for employees ages 60 to 63 to the greater of $10,000 or 150% of the regular catch-up contribution.

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Nongovernmental plans are a primary type of plan, and most of them are 457(b) plans. These plans are tax-advantaged savings plans in the United States.

The Internal Revenue Code governs these plans, which is the same code that governs other types of retirement plans in the United States. This code provides the framework for how these plans operate.

Most nongovernmental plans are 457(b) plans, which is a specific type of plan that offers tax benefits to participants.

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457 plans are often compared to 401(k) plans, but they have some key differences. A 457 plan is designed for government employees and those working for a nonprofit.

One of the main differences is that a 457 plan is not limited to private, for-profit companies like a 401(k) plan. This means that government employees and nonprofit workers can also take advantage of these plans.

Contribution limits are the same for both 457 and 401(k) plans, with workers under 50 able to contribute up to $23,000 in 2024 and workers 50 and older able to contribute an additional $7,500.

You can also use a 457 plan in tandem with other accounts like a 401(k) or IRA, which can be helpful for higher earners who want to further defer income toward retirement.

A 457 plan can be confusingly similar to a 403(b) plan, especially since both are offered in the nonprofit sector. However, they have different contribution limits and rules for withdrawals.

For example, employer and participant contributions on a 403(b) plan can total up to $23,000 or 100% of the employee's salary per year in 2024, whichever is less.

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A 401(k) and 403(b) plan have some similarities to a 457(b) plan, but they also have some key differences.

Both 401(k) and 403(b) plans have the same contribution limits as a 457(b) plan.

If you withdraw money from a 401(k) or 403(b) before age 59½, you'll typically face a 10 percent early withdrawal penalty.

You can withdraw 457(b) funds penalty-free if you retire early or leave your employer, but the distributions will still be taxed as ordinary income.