A 457 Plan is a type of retirement plan available primarily to state and local government employees, and certain non-profit organizations. Named after the section of the Internal Revenue Code that governs it, a 457 plan allows employees to defer income on a pre-tax basis for retirement purposes. These plans are similar to 401(k) and 403(b) plans but have several unique characteristics and advantages.
What Is a 457 Plan?
A 457 plan is an employer-sponsored, tax-advantaged retirement savings account. Contributions to these plans are made on a pre-tax basis, meaning they reduce the employee’s taxable income for the year in which they are made. The funds in the account grow tax-deferred until they are withdrawn, at which point they are subject to ordinary income tax.
Different Types of 457 Plans
There are primarily two types of 457 plans:
- 457(b) Plans: The most common type, offered to employees of state and local governments and tax-exempt organizations. These plans have annual contribution limits and offer flexibility in terms of withdrawals.
- 457(f) Plans: These are “top-hat” plans typically utilized for highly compensated employees in non-profit organizations. The vesting and distribution rules are much stricter compared to 457(b) plans.
Key Features and Benefits
Contribution Limits
For 2024, the contribution limit for 457(b) plans is $22,500. Individuals aged 50 or older can make additional “catch-up” contributions, allowing them to contribute extra funds to their retirement savings.
Special Catch-Up Provisions
457 plans offer an attractive feature known as the “special catch-up”. Employees within three years of the minimum retirement age can contribute up to double the annual limit, allowing them to significantly boost their retirement savings in the final phase of their careers.
No Early Withdrawal Penalty
One of the unique benefits of 457(b) plans is that withdrawals are not subject to the 10% early withdrawal penalty that is typically applied to other retirement plans if you separate from service before age 59½.
Comparative Analysis
457 vs. 401(k) and 403(b)
- Eligibility: 457 plans are generally available to government and certain non-profit employees, whereas 401(k) plans are available to private sector employees and 403(b) plans to public education institutions and certain non-profits.
- Contribution Limits: The contribution limits are similar, but the 457(b) special catch-up provision is unique.
- Withdrawals: Unlike 401(k) and 403(b) plans, 457(b) plans do not have an early withdrawal penalty for distributions made before age 59½ under certain conditions.
Historical Context
The 457 plan was established with the passage of the Revenue Act of 1978 by the U.S. Congress. Its primary aim was to provide a deferred compensation retirement solution for government employees and workers of certain nonprofit organizations.
Applicability
Who Can Benefit?
- State and Local Government Employees: Especially those looking for an alternative to traditional pension systems.
- Non-Profit Organization Employees: Can benefit through 457(b) if offered, or 457(f) for highly compensated employees.
Related Terms
- 403(b) Plan: A retirement plan available to employees of public schools and certain 501(c)(3) tax-exempt organizations.
- 401(k) Plan: A retirement savings plan sponsored by an employer in the private sector.
- Deferred Compensation: Money earned by an employee but paid out at a later date, generally to receive favorable tax treatment.
FAQs
Do 457 Plans Have a Required Minimum Distribution (RMD)?
Can You Roll Over a 457 Plan to an IRA?
Are 457 Plans Protected from Creditors?
References
- IRS. (2024). Retirement Topics - 457(b) Contribution Limits.
- U.S. Department of Labor. (2024). Employee Benefits Security Administration.
Final Summary
In summary, 457 Plans provide a beneficial retirement savings vehicle for government and certain non-profit employees, offering tax-deferred growth, potential for high contributions, and flexibility in withdrawals. Understanding the nuances of these plans can help employees maximize their retirement savings and ensure financial security in their later years.
