Understanding the Concept of a 457 Retirement Plan

A 457 plan is a type of employer-sponsored, tax-favored retirement account designed for employees working in state and local governments, as well as in certain high-income nonprofit organizations. Some 457 plans permit contributors to put in up to 100% of their earnings, and employers may also contribute to these accounts.

The most prevalent form of a 457 plan is the 457(b), which is an excellent tool for accumulating retirement savings due to its high contribution limits. It can be particularly effective when used alongside other tax-advantaged plans to amplify retirement savings.

Understanding a 457(b) plan

A 457(b) plan operates much like a 401(k) or 403(b) plan, though it is limited to state and local government employees, as well as select employees of qualified nonprofit organizations. Eligible employees can opt to defer a portion of their salaries through automatic payroll deductions, which are then invested in their personal accounts.

Most 457(b) plans feature a limited selection of investment options, typically including a range of mutual funds and annuities.

It's essential to be aware of various fees connected to 457 plans, including vendor fees, brokerage fees, advisor fees, record-keeping or custodial fees, and administrative fees. These fees can impact investment yields. Additionally, every mutual fund or annuity carries its own specific investment charges. If fees appear excessive, it might be advantageous to consider alternative investment options or speak with your employer regarding modifying their 457 plan vendor.

457(b) Contribution Limits

The standard contribution limit for a 457(b) plan is set at $23,000 in 2024 and $23,500 in 2025. This overall limit includes both employee and employer contributions.

Participants aged 50 or older might be entitled to make 'catch-up contributions'. The catch-up contribution limit for 2024 and 2025 is $7,500, impacting the total limit for some individuals to $30,500 in 2024 or $31,000 in 2025. Under Secure Act 2.0, workers aged between 60 and 63 can make an additional catch-up contribution starting in 2025, boosting their maximum contribution to $34,250.

Certain 457(b) plans allow for special catch-up contributions, subject to specific plan guidelines. Qualified participants nearing retirement may be eligible to contribute either double the standard contribution limit or the standard contribution limit plus the uncontributed portion from prior years, whichever is lower. Participants who opt for the special catch-up contribution limit are ineligible for standard catch-up contributions.

Notably, 457 plan contribution limits remain unchanged regardless of contributions to other employer-sponsored retirement accounts, such as 401(k) or 403(b) plans.

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457(b) vs 403(b)

On the whole, 457(b) plans share numerous similarities with 403(b) plans. They both serve as employer-sponsored retirement savings vehicles, possess the same standard contribution limits, and employ comparable types of investment accounts to cultivate retirement resources.

Both types of retirement accounts also offer Roth options, allowing for immediate tax payments and subsequent tax-free withdrawals in retirement.

The main distinction between a 457(b) and a 403(b) is that employer contributions to a 457(b) plan contribute towards the annual contribution limit in combination with employee contributions. In contrast, 403(b) plans boast substantially higher contribution limits when factoring in employer contributions along with employee contributions.

Another significant difference lies in the withdrawal rules. 457(b) plan participants can withdraw funds without penalty, though they are still subject to income tax on those withdrawals. Moreover, they are exempted from the 10% early withdrawal penalty typically levied on various other retirement plans.

Additional 457 plan options

Although the 457(b) is the most widely used specific type of 457 plan, some highly-compensated employees might be granted a 457(f) plan. This alternative plan differs significantly from the more common 457(b).

A 457(f) plan permits only the employer to make contributions, effectively excluding employee contributions. No contribution ceilings apply to 457(f) plans, with the employer free to allocate up to 100% of the employee's income to the plan. Moreover, the employee's access to the 457(f) plan depends on their continued employment, and termination or resignation prior to retirement could result in the loss of the 457(f) account.

Lastly, nongovernmental 457(b) plans are available to nonprofit organizations, which cater exclusively to highly-compensated employees - a provision explicitly prohibiting 'rank-and-file' employees from partaking in the plan.

Non-governmental 457(b) schemes differ from governmental plans due to the limitation that funds invested in a non-governmental 457 plan can merely be transferred, or rolled over, into another similar non-governmental plan. Moreover, the resources in a non-governmental 457 account hold a subordinate position in the financial hierarchy relative to any outstanding debt liabilities of the employer. Consequently, these 457 account funds may be confiscated in the event of the employer declaring bankruptcy, given their inferior status.

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The high contribution limits of a 457(b) plan can significantly increase an individual's retirement savings, providing a substantial financial boost in their golden years. It's essential to consider the various fees associated with 457 plans to maximize investment yields and ensure that your retirement money is working for you.