Hospital 457 B Plan: A Comprehensive Guide to Contributions and Investments

A Hospital 457(b) plan is a type of deferred compensation plan designed for hospital employees, allowing them to set aside a portion of their income on a pre-tax basis.

Contributions to a Hospital 457(b) plan are made with pre-tax dollars, reducing the participant's taxable income.

The plan's contributions are tax-deferred, meaning participants won't pay taxes on the contributions until they withdraw the funds.

You can contribute to a Hospital 457(b) plan on a Roth basis, which means you pay taxes on the contributions upfront, but the withdrawals are tax-free.

The plan's investment options may include a range of assets, such as stocks, bonds, and mutual funds.

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A 457(b) plan is a type of tax-deferred retirement savings plan that allows you to contribute pre-tax dollars, reducing your income.

These plans are typically offered by government employers or nonprofits, and are often used by law enforcement officers, civil servants, and university workers.

You can set aside pre-tax dollars in a 457(b) account, reducing your income and potentially growing your savings over time.

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Money in the account can be invested and grow until you take withdrawals, at which point you'll pay taxes on what you take out.

There are two types of 457(b)s, each with different rules, but we'll focus on the basics of how they work.

A 457(b) plan works similarly to a 401(k) or 403(b), allowing you to put money in and select investments for your account.

You can contribute to a 457(b) plan through payroll deductions, and if your employer offers a company match, they'll make contributions as well.

The value of your account is based on your contributions and the investment performance over time, providing a potential source of income in retirement.

The annual contribution limit for a 457(b) plan is $20,500 in 2022, mirroring that of a 401(k) or 403(b).

If you're 50 or older, you can make catch-up contributions, which can be as much as $6,500 extra in 2022, but you'll need to check your plan document to see if your plan allows this.

You can also take advantage of "special catch-up contributions" in the last three years before retirement age, where you can either double your contributions or make up for any years that you didn't put in the maximum $20,500.

Total catch-up contributions are limited to $61,500 in 2022, so be sure to plan accordingly.

If your plan offers both the 50+ catch-up and a type of special catch-up, you can only do the one that allows the larger contribution, not both.

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

With a hospital 457(b) plan, you have control over how your investments are made. You can choose from a range of options offered by your employer's plan.

A typical plan includes a wide range of investment options, from conservative stable value funds to aggressive stock funds. This allows you to build a diversified portfolio of various funds.

You can select a simple yet diversified target-date or target-risk fund, which can help guide your investment decisions. MissionSquare Retirement’s Guided Pathways services provide plan employees with access to financial consultants and Certified Financial Planner™ professionals.

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You can withdraw from a 457(b) plan without penalty, but taxes may still be due. This is a great advantage over other retirement accounts.

Withdrawals are generally taxable, and you'll need to report them as income on your tax return. This means your tax liability may increase significantly, creating a tricky financial situation.

The tax rules for 457(b) plans are similar to those for 401(k) and 403(b) plans. If you made tax-deferred contributions, you'll get an upfront tax break at your marginal tax rate.

Here are some key tax facts to keep in mind:

It's essential to plan carefully before withdrawing from a 457(b) plan, as the tax implications can be significant.

You can withdraw from a 457(b) plan without a penalty for unforeseeable emergencies, such as an illness, accident, or natural disaster.

In-service withdrawals are allowed for employees still working for the employer sponsoring the plan, without demonstrating a specific financial need. This type of withdrawal is also known as an "in-service distribution."

To make an in-service withdrawal, you must still be employed, not have made contributions within the last 24 months, and not have made this type of withdrawal request before. For plans with balances of $5,000 or less, these conditions must be met.

You may be able to roll over the money to another IRA or qualified plan or annuity without tax penalty, if you do so within 60 days.

Required minimum distributions (RMDs) apply to 457(b) retirement accounts, starting when you reach 73 and are no longer working for the employer. You must withdraw the RMD annually, or face penalties.

Here are some key withdrawal rules to keep in mind:

Remember to review your plan's specific rules and consult with a financial professional if you're unsure about your withdrawal options.

The tax implications of a hospital 457(b) plan are a crucial consideration for participants. Withdrawals are generally taxable, but the 10% penalty tax does not apply to distributions prior to age 59½.

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You'll need to view the Special Tax Notice Regarding Plan Payments for detailed tax information. Required minimum distribution (RMD) rules apply to 457(b) retirement accounts, starting at age 73 and beyond.

Withdrawals are taxed at ordinary income tax rates, and if you have minimal other taxable income, you can use the 457(b) withdrawals to "fill the brackets", resulting in a lower effective tax rate. This arbitrage of tax rates is a major benefit of using retirement accounts to save for retirement.

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If you're considering a 457(b) plan, you may wonder if it's the right fit for your needs.

The main alternative to a 457(b) plan is a 403(b) plan, which is designed for certain employees of public schools and tax-exempt organizations.

457(b) plans are often more flexible than 403(b) plans, allowing participants to borrow from their account balances.

For example, some 457(b) plans allow participants to take loans up to 50% of their account balance, up to a maximum of $50,000.

However, 403(b) plans often have more stringent contribution limits, which can be a drawback for some participants.

In contrast, 457(b) plans have a higher annual contribution limit, which can be up to $19,500 in 2022, plus an additional $6,500 if you're 50 or older.

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A hospital 457(b) plan can be a great way to save for retirement, but it's essential to understand the benefits and considerations involved.

One significant benefit is that contributions are made on a pre-tax basis, reducing taxable income and growing tax-deferred until withdrawal.

Tax-deferred growth means your money can compound over time without being subject to taxes, allowing it to grow faster.

Catch-up options are also available for employees over age 50, allowing them to contribute on top of the limit for the year.

For employers, offering a 457(b) plan can be part of a wider recruitment and retention strategy.

A key consideration is that employers do not commonly match employee contributions, unlike 401(k) plans. If they do, the employer contribution counts toward the maximum contribution limit.

Looser rules for early withdrawals are another advantage of 457(b) plans. Participants can withdraw funds without incurring a 10% penalty from the IRS, unlike some other retirement plans.

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However, early withdrawals from a 457 are subject to a 10% penalty if the account holder rolls the funds over from a 457 to any other tax-advantaged retirement account.

Designating beneficiaries is crucial, as it ensures your assets are paid per your wishes and avoids the potential costs and delays of probate.

If you're looking to roll over your hospital 457(b) plan, you'll need to consider your age and the type of plan you have.

You can roll over your 457(b) plan to a traditional IRA or another 457(b) plan, but the options depend on the type of plan you have.

For example, if you were born before July 1, 1949, you'll need to take required minimum distributions from your plan by age 70½.

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With a 401(k), nearly 80% of participants receive some form of employer contribution, which can be a significant boost to your savings.

Employer contributions to 401(k) plans are very common, but the contribution limits are higher when both employee and employer contributions are included, with a maximum of $69,000 in 2024.

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The contribution maximum for employees under age 50 is $23,000, but this can be increased to $69,000 with employer contributions.

This means that if you're under 50, you can contribute up to $23,000 to a 401(k) in 2024, and if your employer matches your contributions, the total amount you can save will be even higher.

401(k)s are subject to the Employee Retirement Income Security Act (ERISA), which offers creditor protection for people with these plans, so your savings are generally safer with a 401(k).

You can roll over your 457(b) retirement plan to a new account, but the options depend on the type of 457(b) plan you have.

If you're 70½ or older, you're required to take minimum distributions from your 457(b) plan, which may impact your rollover options.

You can make withdrawals from your 457(b) account when you leave your job, and you have control over your investments.

Withdrawals are allowed after a certain age, which varies based on the plan, or due to an unforeseeable emergency.

A loan option may also be available, subject to the employer and IRS and plan rules.