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What Is a 457 (b) Plan?

What Is a 457 (b) Plan?

A 457(b) plan is an employer-sponsored retirement savings account with tax benefits. With this plan, you contribute pre-tax money to your salary, and that money will not be taxed until you receive the money, usually when you retire. Some 457(b) plans allow a Roth option where contributions would be made in after-tax dollars, and your money could be withdrawn tax-free during retirement if the conditions for an eligible distribution are met.


What is a 457 (b) plan?

Also referred to as a deferred compensation plan, a 457(b) plan is offered to state and local government officials, such as police, firefighters, and other officials.

Some well-paid directors of nonprofits, such as hospitals, charities, and unions, can also use 457(b) plans.

You can consider the 457(b) plan like a 401(k) for a government official or tax-free organization, but some unique differences make the 457(b) plan even more appealing.


How does a 457(b) plan work?

A 457(b) pension plan is very similar to a 401(k) or 403(b) plan. Your employer offers you a 457(b) plan, and your contributions are deducted from your pre-tax salary, which reduces your taxable income.

You may have the flexibility to invest in the mutual funds of your choice from a variety of funds, while interest and income are not taxed until you withdraw the funds during retirement. Usually, 457(b) plans only offer two types of investments: annuities or mutual funds, and both have tax-deferred.

Unlike 401(k) or 403(b), if you quit or retire before age 59 and need to withdraw retirement funds from a 457(b), you will not pay a penalty of 10%—a great distinction that makes this type of plan even more attractive than its peers.


457(b) Plan contribution limits

Participants in a 457(b) plan can contribute up to 100% of an employee's included salary or $19,500 in 2021, whichever is less. This level has not changed since 2020

If you are 50 or older and your employer allows updated contributions, your contribution limit increases by another $6,500 in 2021. This limit was the same in 2020.

There is a special clawback contribution of 457(b), which is double the annual cap or the annual basis cap plus the amount of the basis annual cap not used in previous years—whichever is less.

You will be able to pay higher catchup contributions three years before retirement age if your plan allows it.

This catchup plan allows you to contribute double the annual limit, up to $39,000 in 2021, or the basic yearly limit added to the basic annual limit not used in prior years. The special 457(b) collection contributions cannot be used in conjunction with 50 years or older collection contributions.

Another advantage of 457(b) plans is that they work well with other plans. Educators, for example, may have 403(b) and 457(b) plan options. If you have a combination of two plans, a 457(b) and a 403(b) or a 401(k) and 457(b), you can contribute the maximum amount to both plans.

This increases the optional annual carry-over limit to $39,000 (the maximum allowable contributions in 2021 at 401(k) and 457(b) combined), even if you are under 50. It does not include collection contributions or any applicable employer combination.

Contribution limits for 457(b) pension plans generally increase periodically. You can always visit this platform for the latest update.


457(b) plan and Employer matching

Some employers may pay the amount you contribute to a 457(b) plan up to a certain limit. If you are lucky to work for this type of employer, take advantage of it by contributing at least as much to the plan as your partner. If the consideration is 50% and you put in $1,000 per month, your employer will contribute $500 per month in your name.

If your employer doesn't currently offer a 457(b), it may be wise to push it for one. When it comes to retirement plans, you would be lucky to have the option to save with a 457(b).


403(b) vs. 457(b) 

How similar are the 403(b) and 457(b) plans, and how are they different? Both are often offered by nonprofits and public sector organizations, which usually don't offer 401(k) plans. With both plans, you can provide up to $19,500 starting in 2021. If you are over 50, you can contribute $6,500.

The main difference is usually who can access it. 403 (b) plans are provided primarily to private, not-for-profit organizations and government officials, including employees of public schools. In comparison, 457(b) plans are usually provided to state and local government officials.


Summary

  • A 457(b) pension plan is very similar to a 401(k) or 403(b) plan.

  • A 457(b) plan is an employer-sponsored retirement savings account with tax benefits.

  • Participants can generally contribute up to 100% of an employee's included salary or $19,500 in 2021, whichever is less.

  • With 457(b) plans, contribute in pre-tax dollars, which are not taxed until you collect the money.


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