How to Use 401(k) and 457(b) Plans to Save for Retirement

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Contributing to both a 401(k) retirement plan and a 457 retirement plan allows you to double your tax-deferred retirement savings and reduce your taxable income. Plus, having both types of accounts can be helpful if you ever need to withdraw money from the plan.

A 401(k) retirement plan is offered by any employer, while a 457(b) plan is offered by state and local governments to their employees.

Certain nonprofit employers can offer 457(b) plans as well. Large government employers often offer their employees both 401(k) and 457(b) plans, which enables those employees to contribute to both plans and thus have an opportunity to supercharge their retirement savings.

Because a 457(b) plan is considered a nonqualified retirement plan, the IRS allows you to contribute to a 401(k) and 457(b) plan at the same time. Each plan has separate limitations on the amount of money you and your employer can put in.

If you are eligible to contribute to both savings plans, you'll need to follow the IRS rules for contribution limits.

401(k) Plan Limits

The salary deferral limit for 401(k) plans as of 2018 is $18,500. If you are age 50 or older, you can make a catch-up contribution of up to $6,000 over the limit.

457(b) Plan Limits 

The annual limit for all contributions made to 457(b) plans is 100 percent of the employee's includable contribution or the elective deferral limit, whichever is less. The elective deferral limit for 2018 is $18,500.

If you are age 50 or older, you can make catch-up contributions, if the plan permits. For three years prior to normal retirement age (as specified in the plan) you can contribute the lesser of twice the annual limit ($37,000 in 2018) or the basic annual limit plus the amount of the basic limit not used in prior years (only allowed if not using age 50 or over catch-up contributions).

Why Save in Both?

For any tax-deferred retirement savings plan, you don't pay taxes on those savings as long as the money remains in the account. However, if you make a withdrawal from a 401(k) savings plan before age 59 1/2, you may be subject to a 10 percent early-withdrawal penalty. Once you reach age 59 1/2, you can make withdrawals penalty free and pay tax on the withdrawals at ordinary income levels.

Unlike a 401(k) savings plan, there are no early withdrawal penalties on a 457(b). You'll still pay ordinary income tax on withdrawals, but you won't be hit with a 10 percent fee.

One caveat with the 457(b) plan is that unlike a 401(k) funded by a private employer, it's uncommon for the government to offer an employee match. Since many state and local government employees are eligible for a pension, the government treats a 457(b) as a supplemental savings plan.

Note: Always consult with a tax professional for the most up-to-date information and trends. Tax laws and rules can change periodically. This article is not tax advice and is not intended as tax advice.