What You Need to Know About Your 457 Plan For a Successful Retirement

When it comes to different types of retirement plans there are more than you might be aware of :401k’s, 403b’s, Keogh Plans, DB(k)’s.  Is your head spinning yet?  One lesser know retirement plan is the 457 Plan (it’s often referred to as a Deferred Compensation plan or Deferred Comp).  It’s a lesser known retirement because it’s only offered to certain types of employees. State and local public employees and sometimes nonprofit organization employees are often offered the 457 retirement plan.  Only employers who are exempt from paying federal income taxes and non-church organizations can offer 457 plans, including:

• State and local governments
• Hospitals
• Educational Organizations
• Charitable Organizations or Foundations
• Trade Associations

It's similar to the more widely known 401(k) plan, where you can choose to contribute to the 457 plan through automatic deductions from your paycheck before the taxes are taken out.  Also like the 401(k), money grows tax-deferred in a 457 retirement account until you withdraw the money. Contribution limits and early withdrawals are treated differently for 457 plan holders, however.

457 Contribution Limits

If your employer offers only a 457 plan as your retirement account option, you can contribute a maximum of $18,000 in 2015 if you're under the age of 50, and up to $24,000 if you're over the age of 50. If your employer also offers either a 401(k) or a 403(b), you have the option of contributing to both the 457 plan and one of the other available retirement accounts.  I have several clients who are employed by the local university and they have the option of contributing to both the 457 plan and a 403(b). You can invest up to the maximum limit for each account! This means you could contribute $18,000 in the year 2015 to your 457 plan, and another $18,000 into the 401(k) or 403(b) plan if you're under the age of 50 (or up to $44,000 if you're over the age of 50).  This probably goes without saying it, but you do have to have enough of income to be able to contribute this amount. This is a great option for people who are starting their retirement savings later than planned, or who just want to take advantage of tax breaks or employee matching as much as possible. For 2015 and future years, the maximum contribution for these plans will increase by $500 increments, and indexed for inflation.

Catch Up Contribution Limits for 457 Plans

If you're over the age of 50 before the end of the calendar year, you're eligible for a “catch-up contribution” in 2015.  You can contribute an additional $6,000 if you have a governmental 457 plan. Also in 2015, if you have been under-contributing to your 457 plan previously, you can make a catch up contribution up to $18,000.  You cannot combine both the $18,000 special catch-up contribution with the over-the-age-of 50 contribution, however.

Early Withdrawals from a 457 Plan

Money saved in a 457 plan is designed for retirement, but unlike 401(k) and 403(b) plans, you can take a withdrawal from the 457 without penalty before you are 59 and a half years old.  This is very important rule that often times goes overlooked with the 457 plan.   I had one encounter with an individual that had retired early and had rolled their 457 plan into an IRA based on a recommendation from their former advisor.  (Notice I said “former”).   By rolling into the IRA, you lose the ability to cash out early to avoid the penalty in case you need access to your funds. There is no penalty for an early withdrawal, but be prepared to pay income tax on any money you withdraw from a 457 plan (at any age). Just like other retirement plans, you do need to start taking distributions from your 457 plan by the age of 70 and a half years old.

Can Your Roll a 457 Plan Into an IRA?

As I mentioned above, you do have that option.  The process is very similar to rolling over a 401k into an IRA.  As a reminder, you just need to be cautious if you retire early for the reasons noted above. If you don't need the money immediately it's in your best interest to leave the money in the account to compound until you are ready for retirement, but it's nice to know that you won't pay a 10% penalty on early withdrawals should there be no other option. This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.