457(b) Plan Contribution Limits
A 457(b) plan is an employer-sponsored retirement plan offered by state and local governments and certain tax-exempt organizations under Internal Revenue Code 501(c). It's a deferred compensation plan that allows you to contribute to a retirement account and shelter those contributions from current taxation.
These plans have contribution limits similar to 401(k) and 403(b) plans. However, there are some important differences that make 457(b) plans an appealing alternative for those eligible to make contributions.
2019 Contribution Limits for 457(b) Plans
Similar to the contribution limits for 401(k)s, employees can generally contribute up to $19,000 to a 457(b) plan in 2019. This contribution limit amount is a slight increase from 2018 when the limit was $18,500.
Those who receive an employer matching contribution will have higher total plan contributions. The total amount an employee may contribute to a 457(b) plan cannot be more than 100 percent of their salary.
As of 2019, workers who are 50 or older can also set aside an additional $6,000 per year as a "catch-up contribution." Those who have worked for the government for at least 15 years may be eligible for an additional catch-up contribution to their 457(b) plan, depending on where they reside.
Workers who are nearing retirement may add even more in catch-up contributions to their 457(b) plans. For three years before the retirement age specified in their plan, employees can contribute up to twice the annual limit, which would be $38,000 in 2019. Or, they can contribute the basic annual limit of $19,000 plus the amount of the basic limit they did not use in prior years. (People who are already making catch-up contributions because they're 50 or older cannot make this contribution at the same time.)
The Benefits of Participating in a 457(b) Plan
There are some significant tax advantages for participants in a 457(b) plan. Just like with 401(k) and 403(b) plans, all contributions to a 457(b) plan grow tax-deferred. This means that those with plans will not pay any income taxes on the contributions they make or investment earnings until they withdraw the funds. Withdrawals are taxed as ordinary income once they're made.
One thing that sets 457(b) plans apart from other retirement plans like the 401(k) and 403(b) is there is no 10 percent early withdrawal penalty for taking money out of the account prior to age 59 ½. This rule only applies as long as you are no longer working for the same employer. This unique distinction often makes 457(b) plans even more attractive than its peers, especially for those planning on retiring early or accessing their retirement funds prior to age 59 1/2.
Retirement Saving Tips for 457(b) Plans
If you work for the government and then change jobs or are terminated, you may transfer the money from your 457(b) account into your new employer's 401(k), 403(b) or 457(b) plan (provided that it accepts transfers). You also may have the option to roll the money over to a traditional IRA.
Employees of tax-exempt organizations can only transfer funds to another tax-exempt 457(b) plan that accepts transfers, leave the money in the plan, or take a taxable distribution if they leave their employer.
Government 457(b) plans may be amended to allow designated Roth contributions and in-plan rollovers to designated Roth accounts. This provides additional opportunities for tax-free growth of earnings.
Those considering a Roth 457 plan can use the pre-tax vs. Roth calculator to determine the best option for their projected tax situation in retirement.