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- A 457 plan is a form of retirement savings plan provided by governmental and not-for-profit entities.
- 457 plans enable you to set aside part of your income, allocate funds into different investment options, and only incur tax liability at the time of withdrawal.
- A lot of employers provide 457 plans alongside other retirement choices.
A 457 plan is a form of deferred compensation designed for employees working in governmental bodies and nonprofits. It is regarded as one of the best retirement plans Since employees have the option to allocate part of their earnings, avoid taxation on that income for now, and increase their funds to achieve long-term objectives.
If you're employed by a nonprofit entity or governmental agency, it might be beneficial to explore the option of a 457 savings plan. Below are some key points regarding these plans.
Understanding 457 plans
Description and summary of what a 457 plan entails
A 457 plan is a kind of retirement savings option designed specifically for workers in nonprofits and government agencies. With this plan, you have the ability to set aside part of your earnings pre-tax, allocate funds into different investment vehicles, and build up financial resources for when you retire. Although only nonprofit entities and government bodies are permitted to provide 457 plans, these can complement other types of retirement accounts such as 401(k) plans. 403(b)s .
"Retirement planning includes the whole family," states Frank Murillo, who is a partner and managing director. Snowden Lane Partners On the surface, consider '401(k)' equivalent plans for government and nonprofit workers.
With a 457 plan, you postpone a portion of your earnings to invest instead. annuities And also build your portfolio with mutual funds. The contributions are tax-deferred, so you will pay taxes upon withdrawing the funds at a later time.
Kinds of 457 plans: 457(b) compared with 457(f)
There are two kinds of 457 plans: the 457(b) and the 457(f).
- 457(b) The IRS designates these as " eligible" deferred compensation plans. These plans adhere to all IRS contribution caps and tax regulations, with contributions allowed from both employers and employees. Governmental entities have access to the 457(b) plan, along with nonprofit and tax-exempt organizations. Some 457(b) plans provide individuals the choice to make designations. Roth Contributions, which are made utilizing post-tax funds.
- 457(f): These plans are designed for nonprofits and government agencies as well, though they aren’t required to follow IRS donation caps. The funding comes entirely from the employer, enabling them to link the benefits to factors like performance, length of service, or other criteria. As stated by the IRS, such arrangements can be referred to colloquially as “golden handcuffs” plans.
"Similar to how 401(k)s and 403(bs) operate, 457(b) plans also have contributions made periodically through payroll deductions," explains Brian Haney, who founded and leads the company as its CEO. The Haney Company For 457(f) plans, these tend to be much more at the discretion of the employer and are frequently funded all at once whenever they decide to do so.
Advantages of a 457 Plan
Tax-deferred savings
Contributing to a 457 plan enables you to lower your taxable income and postpone tax payments until a future time, akin to how a traditional IRA works. 401(k) Or with an IRA, you'll owe taxes at the time of withdrawal. This could offer financial benefits if you anticipate being in a lower tax bracket during your retirement years.
No early withdrawal penalties
A significant benefit of 457 plans is that you can start withdrawing funds once you cease working for the organization sponsoring the plan. This differs considerably from other retirement plans like IRAs And 401(k)s, where you must reach the age of 59 ½ before making withdrawals from your account.
For a 457 plan, you must begin taking Required Minimum Distributions (RMDs) from your account beginning at either age 72 or 73, contingent upon when you were born. This specific yearly withdrawal sum will differ according to your age, total balance, and additional variables.
Coordinating with additional retirement plans
A 457 plan can also be utilized alongside other types of accounts such as a 401(k) or an IRA. Often, you might have the option to select both a 457 plan along with another account to increase your total contributions.
Haney states that these turn into highly beneficial and precious tools enabling high-income individuals to postpone additional earnings towards their retirement.
Contribution caps for 457 plans
Contributions to 457 plans are primarily funded through payroll withholdings from participants' salaries; however, employers have the option to add contributions as well. Regardless of who makes the contribution, there is a single combined cap for both sources.
This is how those contributions appear in 2024:
|
Age |
Contribution limit |
|
< 50 |
2024: Either 100% of your salary or $23,000, whichever amount is smaller. |
|
50 or older |
2024: $30,500 ($23,000 + $7,500 for catch-up contributions) |
|
In the three years leading up to the retirement age outlined by the plan, |
$41,000 or the basic limit ($23,000), plus any unutilized portion of your previous year’s base limit, with the lower value being applicable. |
Participants who are 50 years old or more can make catch-up contributions only if they are part of a governmental 457(b) plan. For those enrolled in a nonprofit 457(b) plan, the contribution cap stands at $23,000.
When contrasting 457 plans with alternative retirement savings options
457 plan vs. 401(k)
Both 457 and 401(k) plans serve as effective tax-favored tools for employees aiming to build their financial future. These programs provide fiscal incentives, matching contributions from employers, and various investment options.
Nevertheless, a 401(k) plan is tailored for workers in private, profit-driven corporations, while a 457 plan targets individuals employed by governmental organizations and nonprofits.
The contribution caps are identical for both 401(k) and 457 plans: Individuals under 50 years old can deposit up to $23,000 in 2024, with those aged 50 and above being allowed an extra catch-up amount of $7,500. However, the three-year catch-up provision does not apply to 401(k) accounts.
457 plan vs. 403(b)
It can be quite simple to mix up 457(b) plans and 403(b) plans since they're both available in the nonprofit industry. Sometimes, an employer might provide access to both options at once.
Even so, these two represent quite distinct choices for retirement savings. One key difference lies in the contribution caps set by employers and participants under 403(b) plans. Collectively, their contributions are capped at either $23,000 or 100% of the employee’s annual wage, whichever is lower, as of 2024.
Rollover options are available for all 403(b) accounts, whereas they are allowed inconsistently across 457 plans. Furthermore, early withdrawals from 403(b)s incur a 10% penalty unless taken after reaching 59 years and six months of age. In contrast, 457(b) account holders may access their funds without penalties once they cease employment with the organization.
FAQs about 457 plans
What does a 457 plan entail?
A 457 plan represents a form of deferred compensation retirement scheme provided to personnel working in state and local governments as well as certain not-for-profit entities. This arrangement enables contributors to accumulate funds for their later years without paying taxes until withdrawal.
What advantages does a 457 plan offer?
The advantages of a 457 plan encompass tax-deferred growth, absence of early withdrawal penalties for distributions prior to reaching 59½ years old, and the option to make additional catch-up contributions as you approach retirement.
What is the maximum amount I can put into a 457 plan?
In 2024, the yearly maximum you can contribute to a 457 plan will be $23,000, plus individuals who are at least 50 years old have the option to make extra contributions up to $7,500. These contributions may also coincide with limits from other retirement accounts.
What distinguishes a 457 plan from a 401(k) or 403(b)?
Although akin to a 401(k) or 403(b) in offering tax-deferred retirement benefits, a 457 plan stands out with distinctive attributes such as zero early withdrawal fees and varying contribution caps. This type of plan generally caters to those working for governmental bodies and nonprofits.
Is it possible for me to transfer my 457 plan into another retirement account?
You have the option to transfer funds from a 457 plan into another type of retirement account such as a 401(k) or an IRA. It’s advisable to seek guidance from a financial advisor to explore which choice suits you best.
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