What Is a 457(b) Plan?
How 457(b) Plans Work to Help You Save for Retirement
A 457(b) plan is an employer-sponsored, tax-favored retirement savings account. Also known as a deferred compensation plan, it's offered to state and local government employees, including police officers, firefighters, and other civil servants. Some high-paid executives at certain nonprofits like hospitals, charities, and unions also get access to 457(b) plans. You can think of the 457(b) plan as a 401(k) for the government-worker set—but there are a couple of unique differences that make a 457(b) even more attractive.
Advantages of 457(b) Plans
A 457(b) retirement plan is a lot like a 401(k) or 403(b) plan. A 457(b) plan is offered through your employer, and contributions are taken from your paycheck on a pre-tax basis, which lowers your taxable income. You can invest the contributions in mutual funds that you choose from an array of options, and the interest and earnings aren't taxed until you withdraw the funds at retirement. That means the money has the opportunity to accumulate more quickly in the meantime.
Unlike a 401(k) or 403(b), if you leave a job or retire before age 59 1/2 and need to withdraw your retirement funds from a 457(b), you won't pay a 10% penalty fee. This is a big distinction that makes this type of plan even more attractive than its peers.
How Much You Can Contribute to a 457(b) Plan
Participants in a 457(b) plan can generally contribute as much as $19,000 to the plan in 2019. If you're age 50 or older and your employer allows something called catch-up contributions, your contribution limit increases by an additional $6,000. This is similar to a 401(k) or 403(b) plan.
However, with a 457(b) plan, some employers offer an even better catch-up contribution deal three years before retirement age. You may qualify to contribute twice the annual limit, which was $38,000 in 2019. The possible tax-deferred investment compounding could be significant. Of course, the amount you contribute to a 457(b) plan each year cannot exceed 100% of your salary.
Another benefit to 457(b) plans is that they work well with other plans. Teachers, for example, may be offered both 403(b) and 457(b) plan options. If you have a combination of two plans—a 457(b) and a 403(b) or a 457(b) and a 401(k)—you can contribute the maximum amount to both plans. That brings your annual elective deferral limit up to $36,000 even if you're younger than 50. That's not even including catch-up contributions or any applicable employer match.
Contribution limits for 457(b) retirement plans typically increase every one to three years. Check the IRS website to find the most up-to-date information.
457(b) Plans and Employer Matching
Some employers may match the amount that you contribute to a 457(b) plan up to a certain limit. If you're lucky enough to work for such an employer, take advantage of it by contributing to the plan at least as much as the match. If the match is 50% and you put in $1000 per month, your employer is giving you an extra $500. It's like the raise you've been waiting for.
Not all government employers are required to offer employees access to 457(b) plans, as nonprofits are required to offer 403(b)s. But if your employer does not currently offer a 457(b), it doesn't hurt to lobby for one. When it comes to retirement plans, you would be lucky to have the chance to save in a 457(b).
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