The 457 Plan
457(b) plans are tax-deferred retirement accounts offered to local and state government employees. 457(f) plans are for top-level nonprofit executives.
Your pension is not enough. it is up to you to make up the shortfall by investing in your 403(b), 457, and Roth IRA.
What is a 457 Tax-Sheltered Annuity?
A 457 plan is a tax-deferred retirement plan. This specific type of plan will allow you to save for retirement while also setting aside funds to supplement your pension benefits.
Your pension and 457(b) plan work together.
Like a 401(k), a 457(b) plan can help supplement your pension. If you work for the state or local government, this retirement plan can provide you with the flexibility to change as your needs change. 457(b) plans are a good option if you’re looking for help turning your salary into a more financially stable retirement.
How can a 457(b) deferred compensation plan help you save?
- Flexibility: Save whatever amount of money works for your budget. You can start/stop/increase/decrease payments (up to the federal limit) at any time.
- Savings are deducted from your paycheck.
- Choose what investments you would like to contribute to, change them whenever.
- Tax-deferred means you don’t have to pay taxes on these funds until you withdraw. When you are ready to withdraw, you’ll most likely be in a lower tax bracket, which means you’ll pay less income tax on this money.
Pros and Cons of the 457 Plan
Pros
- If you are within three years of average retirement age, 457(b) plans allow you to double your contributions.
- If you’re at least 50 years old, you can contribute an additional $6,500.
- 457(b) distributions can be taken when you no longer work for the employer. If you continue to work for the employer, you have to wait until you’re 70.5 years old. Additionally, you can access the money in case of an emergency.
- Rollover options for 457(b) plans include rolling into an IRA or 401(k). Not applicable to 457(f) plans.
Cons
- If your employer makes contributions to your 457(b) plan, they will count towards your maximum contribution.
- Most of the time, governments do not provide matching programs for a 457(b) plan. Usually, saving is entirely up to the employee.
- 457(f) plans typically require that the employee works for at least two years. If the employee resigns before that, they forfeit their right to the plan.
The 457 Plan has two types.
A 457(b) is offered to state and local government employees, while a 457(f) is for top-level nonprofit executives.
457(b)
If you have a 457(b) plan, you can contribute up to $19,500 in 2021. Additionally, you can contribute $6,500 in 2021 if you’re age 50 or older.
You may be able to contribute as much as $39,000 if you are within 3 years of retirement age. If you choose to do this, your maximum contribution is limited by previous contributions.
This limit is, according to the IRS, “The basic annual limit plus the amount of the basic limit not used in prior years (only allowed if not using age 50 or over catch-up contributions).”
457(f)
For a 457(f) plan, the benefits received directly correlate with the duration of service and performance metrics.
457(f) plans are typically used to recruit executives from the private sector. Under these plans, employees receive tax-deferred compensation. However, these funds are subject to a “substantial risk of forfeiture.” This means that if the employee doesn’t meet the required service duration (typically 2 years), they can lose all of their benefits. If the executive meets performance requirements and service requirements, the compensation is guaranteed and taxable as gross income.
457(f) plans have no limit on the amount of income that can be deferred from taxation. Remember, any deferred funds are subject to a substantial risk of forfeiture.
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