What is a 457(b) or 457(f) plan. As I sat at my kitchen table, sipping my morning coffee, I couldn’t help but think about the financial journey I’ve been on. Over the years, I’ve become increasingly interested in personal finance, and one topic that has always intrigued me is retirement planning. Today, we look at in-depth but a lesser-known retirement plan called the 457 plan. In this comprehensive guide, we’ll be covering everything you need to know about the 457 plan – from the basics to the intricate details – so you can make informed decisions about your retirement.
Table of Contents
What is a 457 Plan?
A 457 plan is a type of tax-advantaged, deferred compensation retirement plan available to certain employees in the United States. It’s primarily designed for state and local government employees, as well as some nonprofit organizations.
457 Plan vs. 401(k) and 403(b) Plans: What’s the Difference?
Although 457 plans may seem similar to 401(k) and 403(b) plans, they have some key differences:
- Early Withdrawals: Unlike 401(k) and 403(b) plans, 457 plans do not impose a 10% penalty on withdrawals made before age 59½. This makes it an attractive option for those who may need access to their funds earlier.
- Contribution Limits: While the annual contribution limits are the same for all three types of plans (in 2023, it’s $22,500), the 457 plan allows for a unique “double catch-up” provision for participants nearing retirement, allowing them to contribute even more.
- Employer Eligibility: 457 plans are available to state and local government employees and some nonprofit organizations, while 401(k) plans are typically offered by private-sector employers and 403(b) plans by public schools and certain tax-exempt organizations.
3 Types of 457 Plans: Governmental vs. Non-Governmental
There are three popular types of 457 plans:
- Governmental 457(b) plans are offered by state and local governments, and their assets are held in a trust for the exclusive benefit of the plan participants.
- Non-governmental 457(b) plans are offered by certain tax-exempt organizations, and their assets are technically part of the employer’s general assets, making them subject to creditors in case of the employer’s bankruptcy.
- 457(f) plans: The 457(f) plan is typically offered to highly compensated executives or key employees. Unlike 457(b) plans, 457(f) plans do not have any specific contribution limits. However, the benefits in a 457(f) plan are not considered “vested” until the participant meets certain conditions (such as continued employment until a specified date or meeting specific performance goals). Once the benefits are vested, they become taxable as ordinary income. It’s important to note that the assets in a 457(f) plan are also considered part of the employer’s general assets, which means they are subject to creditors in case of the employer’s bankruptcy.
Contribution Limits and Catch-Up Provisions
The following table outlines the 2023 contribution limits for 457 plans:
|Basic annual limit||$22,500|
|*Catch-up for ages 50+||$7,500|
|**Special “double catch-up”||Up to $45,000|
*457(b) plans of state and local governments may allow catch-up contributions for participants who are aged 50 or older.
**In the three years preceding the participant’s normal retirement age, they can take advantage of the special “double catch-up” provision, allowing them to contribute twice the normal limit. This is particularly beneficial for those who may have started saving for retirement later in life.
Investment Options and Strategies
Investment options within a 457 plan may include a variety of mutual funds, index funds, and target-date funds, among others. When choosing your investments, consider factors like your risk tolerance, time horizon, and overall financial goals. Additionally, it’s essential to keep an eye on fees and expenses, as they can significantly impact your long-term returns.
Distribution Rules and Withdrawals
Unlike other retirement plans, the 457 plan has more lenient withdrawal rules:
- No 10% early withdrawal penalty for distributions made before age 59½.
- Withdrawals can be made upon separation from employment, regardless of age.
- Required minimum distributions (RMDs) start at age 72, just like other retirement plans.
Keep in mind that withdrawals will be taxed as ordinary income. You can choose from a variety of distribution options, such as lump-sum payments, periodic payments, or rolling the balance over to another eligible retirement plan like an IRA.
Benefits and Drawbacks of a 457 Plan
- No early withdrawal penalty
- Tax-deferred growth
- Special “double catch-up” provision
- May be offered alongside other retirement plans, allowing for increased savings potential
- Limited investment options compared to an IRA
- Non-governmental 457 plans have less asset protection
- May not be available to all employees
- Possible administrative fees associated with the plan
The 457 plan may not be as well-known as its 401(k) and 403(b) counterparts, but it’s definitely worth considering for eligible employees. With unique features like penalty-free early withdrawals and the special “double catch-up” provision, it can provide valuable flexibility and increased savings potential for your retirement journey.
Now that you’re armed with this knowledge, we encourage you to explore your own retirement planning options and share your thoughts in the comments below. And if you found this guide helpful, don’t forget to share it with friends and family who might also benefit from learning about the 457 plan.
Frequently Asked Questions (FAQs)
Is 457 plan only for high-income earners.
While 457 plans can certainly benefit those with higher incomes, they can also be a valuable tool for anyone eligible who wants to save for retirement and possibly access funds before age 59½ without penalty.
457 plan isn’t worth considering if you already have a 401(k) or 403(b) plan.
Many employees can contribute to both a 457 plan and a 401(k) or 403(b) plan, effectively doubling their tax-advantaged retirement savings potential.
Can I roll over my 457 plan to another retirement account like an IRA or a 401(k)?
Yes, you can roll over your governmental 457(b) plan to another eligible retirement account such as a traditional IRA, a Roth IRA, or another employer-sponsored plan like a 401(k) or 403(b) when you leave your job or retire. However, rolling over to a Roth IRA may require you to pay taxes on the amount rolled over. Non-governmental 457(b) plans generally cannot be rolled over into an IRA or other qualified plans.
Can I take a loan from my 457 plan?
The availability of loans from your 457 plan depends on your plan’s specific provisions. Some 457(b) plans may allow participants to take loans under certain circumstances, while others may not. It is essential to check with your plan administrator for details regarding loan provisions in your plan.
Can I contribute to both a 457 plan and another retirement plan, like a 401(k) or 403(b), at the same time?
Yes, you can contribute to both a 457 plan and a 401(k) or 403(b) plan simultaneously, provided your employer offers both plans. You can contribute up to the maximum annual limit for each plan, effectively doubling your tax-advantaged retirement savings potential.
How do I know if I’m eligible to participate in a 457 plan?
Eligibility for a 457 plan depends on your employer. If you work for a state or local government, you may be eligible for a governmental 457(b) plan. If you work for a tax-exempt organization, you may be eligible for a non-governmental 457(b) plan, though these are generally limited to select management or highly compensated employees. Check with your employer or human resources department to determine your eligibility.
What happens to my 457 plan if I change jobs?
If you change jobs and your new employer also offers a 457 plan, you may be able to transfer your account to the new plan. If your new employer doesn’t offer a 457 plan or you prefer not to transfer, you can leave the account with your former employer and let it continue to grow tax-deferred, roll it over to an eligible retirement plan like an IRA, or choose to withdraw the funds (keeping in mind potential tax implications).