457 Plan Contribution Limits
IRS Contribution Limit to a 457 Deferred Compensation Plan is $18,500 in 2018
A 457 plan is an employer-sponsored retirement plan offered by state and local governments and certain tax-exempt organizations under Internal Revenue Code 501(c). The 457(b) plan is a deferred compensation plan that allows you to contribute to a retirement account and shelter those contributions from current taxation. 457(b) 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.
Below are the contribution limits for the 2016 tax year:
2018 Contribution Limits for 457(b) Plans
Similar to the contribution limits for 401(k)s, you can generally contribute up to $18,500 to a 457(b) plan in 2018. This contribution limit amount is a slight increase from 2017 when the limit was $18,000. If you are a governmental worker rather than working for a tax-exempt organization there is another “catch-up” contribution available. If you are age 50 or older you can set aside an additional $6,000 in "catch-up” contributions ($24,500 contribution limit for ages 50 or older in 2018). Both the general contribution limit and the "catch-up" limit are scheduled to increase in the future with inflation.
Regardless of whether you work for a governmental employer or a tax-exempt organization another “catch-up” option exists. If you are nearing retirement, you can add even more in catch-up contributions to your 457(b).
For three years before you retire, you may qualify to contribute double the annual contribution limit. That's a potential contribution of $37,000 in 2018. However, keep in mind that you may not take advantage of both catch-up options in the same year. But If you receive an employer matching contribution, your total plan contribution amount could be even greater.
Keep in mind that the total amount you may contribute to your 457(b) plan cannot be more than 100% of your salary.
What are the benefits of participating in a 457(b) plan?
There are some significant tax advantages for participants in a 457(b) plan. Just like 401(k) and 403(b) plans, in a 457 plan all contributions grow tax-deferred. This means that you will not pay any income taxes on the contributions that you make or the investment earnings within your retirement plan until you withdraw the funds. When you begin making withdrawals from the plan these withdrawals are then taxed as ordinary income. One thing that sets 457 plans apart from other retirement plans like the 401(k) and 403(b) is there is no 10% early withdrawal penalty if you decide to take money out of your 457 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 Plans
- 457 plans are now more portable than ever. If you work for a governmental employer and then change jobs or are terminated, you may transfer the money from your 457 account into your new employer's 401(k), 403(b) or 457 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 plan that accepts transfers, leave the money in the plan, or take a taxable distribution if they leave their employer.
- Governmental 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. Note: If you are considering a Roth 457 Plan, you can use the pre-tax vs. Roth calculator to determine the best option for your projected tax situation in retirement.
- When selecting an investment asset allocation mix, be sure to take your investment goals, risk tolerance and time horizon into account.
- Check to see if your plan offers an employer match. If one is available it is generally advisable to contribute at least the amount needed to receive the maximum matching contribution amount.