A 457 plan is a special retirement savings account offered by some employers, particularly state and local government agencies and some well-paid nonprofit workers. This plan comes with tax benefits, which means you can save money on your taxes while preparing for retirement.
In some 457 plans, employees have the option to stash away up to 100% of their incomes into their retirement accounts. Additionally, employers may also contribute money to these accounts, which is a nice perk.
The most common type of 457 plan is known as the 457(b). It’s a fantastic tool for building your retirement fund because it allows for substantial contributions. You can even combine it with other tax-advantaged accounts to boost your retirement savings.
How does a 457(b) plan work?
A 457(b) plan works kind of like a 401(k) or 403(b) plan, but it’s specifically for folks who work for the government or certain nonprofits. If you qualify, you can choose to save a portion of your paycheck for retirement, and this money goes into an investment account with your name on it.
Now, here’s the deal with most 457(b) plans: they usually don’t give you a ton of choices when it comes to investing your money. You’ll usually pick from a selection of mutual funds and annuities.
But there’s something important to keep in mind – fees. 457 plans come with various fees that can nibble away at your investment gains. There are vendor fees, brokerage fees, advisor fees, record-keeping or custodial fees, and administrative fees to watch out for. On top of that, each mutual fund or annuity has its own set of fees. If you find these fees are eating up too much of your potential earnings, it might be a good idea to explore other investment options or chat with your employer about changing the 457 plan they offer.
Types of 457 Plans
There are two main flavors of 457 plans:
- The 457(b): This one’s the most typical. It’s for folks working in state and local government gigs and certain nonprofits. Think of it as a savings plan for your retirement, and it gives you some nice tax perks.
- The 457(f): Now, this one’s a bit more exclusive. It’s strictly for the big-shot executives who make a lot of money in tax-exempt organizations. It’s like an add-on to the 457(b), and in simple terms, it’s a way to delay getting some of your paycheck until later down the road.
457(b) contribution limits
Let’s break down the contribution rules for a 457(b) plan in simpler terms:
- Regular Contribution Limits: In 2022, you could stash away up to $20,500 in your 457(b) plan. But in 2023, this limit bumped up to $22,500. This limit covers the total of what you put in and what your employer adds.
- Catch-Up Contributions for Folks 50 and Up: If you’re 50 or older, you get to add a bit more. In 2022, it was $6,500, and in 2023, it’s $7,500. So, if you’re in this age group, your total limit can be as high as $27,000 in 2022 or $30,000 in 2023.
- Special Catch-Up Contributions: Some 457(b) plans have a cool feature. If you’re in the last three years before retiring, you might be able to put in either double the regular limit or the regular limit plus the amount you missed in previous years (if you didn’t contribute the full amount). But here’s the catch: if you go for the special catch-up, you can’t also get the regular catch-up.
- No Clash with Other Plans: Here’s a good thing – what you save in your 457 plan doesn’t get in the way of other retirement plans your employer offers. So, if they have a 457 plan and something like a 401(k) or 403(b), you can max out both if you want.
457(b) vs 403(b)
Let’s simplify the comparison between 457(b) and 403(b) retirement plans:
- Similarities: Both 457(b) and 403(b) plans are like cousins in the retirement savings world. They’re offered by employers to help you save for retirement. They come with the same regular contribution limits, and you can invest your money in similar ways to grow it over time.
- Roth Option: Both of these plans also give you a Roth option. If you prefer, you can pay your taxes on the money you put in right now, and then when you retire, you can take your money out without worrying about taxes.
- The Big Difference – Contribution Limits: Now, here’s the big difference. In a 457(b) plan, what your employer puts into your account counts against the same limit as what you put in. But in a 403(b) plan, the contribution limits are much higher because they include what both you and your employer contribute.
- Flexibility in Withdrawals: Here’s another thing to note. If you have a 457(b) plan, you can take your money out whenever you want, and you won’t face that pesky 10% early-withdrawal penalty that some other retirement plans have. However, you’ll still need to pay income tax on what you withdraw.
Other types of 457 plans
Let’s break down the differences between 457(b) and 457(f) plans and touch on nongovernmental 457(b) plans:
- 457(b) vs. 457(f): While the 457(b) plan is more common, some higher-paid employees might get offered a 457(f) plan, which is quite different. In a 457(f), the employee doesn’t chip in any money; it’s all on the organization. There are no strict contribution limits, and the employer can put in as much as 100% of the employee’s income. But, there’s a catch – you can only access the funds if you stick with your job. If you leave early or get let go, you might lose access to your 457(f) account.
- Nongovernmental 457(b) for Nonprofits: Now, for nonprofits, there’s something called a nongovernmental 457(b) plan, but it’s only for highly-paid folks. Regular employees don’t qualify. Here’s an important thing to know: the money you put into a nongovernmental 457(b) plan can only be rolled over into another nongovernmental 457 plan, and the funds in this account aren’t as secure in the event of your employer going bankrupt. They could be used to cover debt obligations.
So, in a nutshell, there’s quite a bit to consider when it comes to 457 plans, and they come in different flavors depending on your job and employer.
