How Does a 457(b) Plan Work?
Another type of retirement savings plan available to employees of state and local governments, as well as some tax-exempt organizations, is a 457(b) plan. These plans are not used by private companies.
Contributions
Employees make contributions to the plan on a pre-tax basis. The contributions are not subject to federal income taxes, although they may be subject to Social Security and Medicare taxes. For 2023, the maximum amount an individual can contribute to a 457(b) plan is $22,500. Individuals 50 years old and older may also contribute up to $7,500 per year as a catch-up contribution. In some plans there is a special provision, if you are within three years of the normal retirement age specified by the plan, you may be eligible to contribute up to the lesser of double the annual limit or the applicable dollar limit plus sum of unused deferrals in prior years as an additional “special catch-up” provision. Like 401(k) plans, some 457(b) plans allow employers to make contributions to employee accounts.
Investment Options
Along the lines of other retirement plans, a 457(b) plan may offer a range of investment options from which to choose. The options may include mutual funds, ETFs, and other investment vehicles. The investment choices available will depend on the unique plan offered by the employer.
Withdrawals
Are allowed when a separation from service occurs (retire or leave the job). Unlike 401(k) and 403(b) plans, there is no penalty for early withdrawals from a 457(b) plan, even if you are under the age of 59½, but any withdrawals will be subject to income taxes in the year of withdrawal.
Rollovers
If an employee leaves his/her job, he/she may have the option to roll over the 457(b) plan balance into another eligible retirement account, such as an Individual Retirement Account (IRA) or the new employer’s retirement plan. By rolling over the account balance, taxes are deferred, and the investments continue to grow tax advantaged.
Access to a 457(b) plan in addition to other retirement plans, such as a 401(k) or an IRA, can help serve as an additional vehicle for investing for retirement. Having multiple retirement accounts can provide diversification and increase the overall retirement savings potential.
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Missie Beach, CFP®, CDFA®
Senior Financial Advisor
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