457 Plans

457 Plans — Retirement savings benefits for governmental employees


457 Plans — Retirement savings benefits for governmental employees

Another type of employer-sponsored retirement plan named after the section of the tax code, 457 plans are designed for state and local governmental institutions. A 457 plan may also be offered by certain tax-exempt organizations, but in these cases only select management personnel and highly compensated employees can participate in the plan, and there may be other restrictions.

 Like the more familiar 401(k) plan, a 457 plan offers a number of benefits:

  • Current tax deductions — You can save a percentage or specific dollar amount of pay up to certain IRS-defined annual limits. The contribution is deducted from your taxable income before taxes are considered. This will lower your current income tax bill. Taxes are owed when a withdrawal is taken from the plan.

For government workers, a 457 plan offers many savings benefits to help you reach your retirement savings goals.

  • Tax-free retirement income — Some plans allow you to make contributions to a Roth 457 account. Roth contributions are made after you’ve paid taxes on the income, but qualified withdrawals may be taken tax free in retirement.1
  • Tax-deferred investment earnings — Investment earnings are reinvested and grow tax deferred, which means you don’t pay taxes on the earnings until you withdraw the money. Since your earnings are reinvested, the account may grow faster than a comparable taxable account.
  • Focused investment options — Participants can choose from a focused menu of investment funds that have been screened as being appropriate for diversified retirement investing. Some plans also offer “one choice”
    asset allocation funds that can help simplify the investment decision-making process.
  • Personal control — You decide how much to contribute and where to invest. Your contribution amount and investment choices can be changed. If you leave your job, you can roll it into an Individual Retirement Account (IRA) or may be able to transfer your vested account balance into another employer’s plan.

Special 457 withdrawal and contribution options

Unlike a 401(k) or 403(b) plan, withdrawals from a 457 plan are not generally subject to a 10 percent early withdrawal penalty. However, if you roll over money from another type of plan into a 457, those rollover funds would be subject to the early withdrawal penalty.

A 457 plan has a special Double Limit catch-up feature for participants within three years of their normal retirement age. If you haven’t made the maximum allowable contributions to your 457 plan in prior years, you may be able to make special catch-up contributions. The special catch-up is the lesser of: twice the normal annual contribution limit or the annual contribution limit plus the difference between the annual limit and what was under contributed in prior plan years.

A powerful way to save for the future

For government employees, a 457 plan offers many savings benefits that may make it easier to reach retirement savings goals. The hands-on features provide a lot of control.

1 A qualified distribution of designated Roth contributions is excludable from gross income. A qualified distribution is one that occurs at least 5 years after the year of the participant’s first designated Roth contribution (counting such first year as part of the 5) and is made:
- On or after the participant’s attainment of age 59½,
- On account of the participant’s disability, or
- On or after the participant’s death.

If the distribution is not a qualified distribution, then the accumulated Roth 457(b) earnings will be subject to tax, and an additional penalty may apply. Roth 457(b) amounts are subject to the same required minimum distribution rules as other contributions made to the 457(b) plan.