A 457(b) plan (also referred to as a 457 plan) is a retirement savings vehicle available to some state and local government employees. It works like a 401(k) in that employees can divert a portion of their pay to the retirement account. This provides an immediate tax break by reducing participants’ taxable income. We go over what 457(b) plans are, the contribution limits associated with them, how to roll them over into other retirement accounts and more.
What Is a 457(b) Plan?
Many public employees have the option of saving for retirement in a 457(b) plan. 457(b)s are most often afforded to state and local government employees. Here are some specific examples:
- Police officers
- Public school teachers
- Municipal employees, like sanitation workers
- Government officers
These employees can opt to have money taken out of each paycheck and stashed in a 457(b) retirement account. Their take-home pay will shrink by the amount they contribute to the 457(b), meaning that their tax burden will also be lower.
The money in a 457(b) grows, tax-deferred, over time. When the participant retires and starts to take distributions from the 457(b), those distributions are taxed as regular income. A 457(b) is an example of a defined contribution plan. If you have access to a 457(b), you may also have access to a defined benefit pension plan.
Similar to how IRAs and 401(k)s come in a Roth variation, you can get a Roth 457(b). This lets you save with after-tax dollars. To be clear, that means you won’t get a reduction on your taxable income now, but you will get the advantage of taking tax-free distributions when you hit retirement. Unlike a Roth IRA, which can be set up by any individual without the consent or participation of an employer, the Roth 457(b) requires employer sponsorship.
Not everyone who has access to a 457(b) has access to a Roth 457(b). If you can’t save in a Roth 457(b) but you want to diversify your tax risk in retirement, you may consider opening a Roth IRA through a brokerage.
457(b) Contribution Limits
In 2019, the 457(b) contribution limit is $19,000 for those under 50, with an optional catch-up contribution limit of $6,000 for those 50 and up. Additionally, employees who are within three years of retirement age as specified in the plan can make special 457(b) catch-up contributions. If you qualify for this in 2019, you can contribute up to double the annual limit, which is $38,000.
But what if your employer offers a 457(b) and another retirement plan? In that case, you can contribute to two plans simultaneously. That means you can double your retirement contributions.
One more IRS rule: If you were saving in a 401(k) at, say, a private company and then became a public school teacher with a 457(b) in the same year, your total contributions across both plans can’t top $19,000.
457(b) Withdrawal Rules
When it comes to withdrawals, 457(b) plans have a big advantage over 403(b)s and 401(k)s. They do not come with early withdrawal penalties if you leave your job. So if you need to tap into your 457(b) contributions before you reach age 59.5 and you’ve left the job that provided you with the 457(b), don’t fret.
By contrast, withdrawals from 401(k) and 403(b) accounts are taxed as regular income. In addition, these distributions face the IRS 10% early withdrawal penalty. This lethal combination will deprive you of a significant portion of your payout. Ideally you would let your retirement savings grow and mature, waiting to draw them until you reach retirement age.
A 457(b) can be rolled over into any other retirement account. Here’s the IRS chart that explains what types of accounts can be rolled into what.
If you’re looking to complete a rollover, pick a new plan and ask the new provider to give you tips on how to initiate the rollover. Your new provider will be able to help you navigate the bureaucracy involved with getting your 457(b) money out and rolled over. More importantly, by doing this, you should be able to avoid all tax penalties.
Comparing Retirement Plans: 457(b) vs. 403(b) vs. 401(k)
One of the most important benefits of 457(b)s have over 401(k)s and 403(b)s is the complete lack of early withdrawal penalties so long as you have left the job through which you had the 457(b). But what about other differences?
401(k)s and 457(b)s are both defined contribution plans. 401(k) plans are available to employees in the private sector. If you’re currently an employee of a state or local government, you won’t be able to switch from a 457(b) to a 401(k) without changing jobs.
More similar to a 457(b) is the 403(b). In fact, public employees may have the option of choosing one or the other, or sometimes even both. So how can you select between the two plans?
Let’s say you decide to leave your job. This is called “separation from service.” At the time of separation, you might find yourself without an income while you’re looking for another job. If you have a 457(b), you can withdraw funds from the account without facing an early withdrawal penalty. But if you’ve been saving in a 403(b), you’ll take a 10% penalty surtax on any distributions you take before you hit age 59.5.
Although the elective deferral limits are the same for both 457(b) and 403(b) plans, 403(b)s have higher limits for total contribution. In this context, your “contribution” refers to the total of your elective deferrals, employer match and employer discretionary contributions. With a 457(b), any contributions your employer makes on your behalf count against your total contribution limit for the year.
If you’re a public employee and have access to a retirement plan, you should be making contributions to save for the future. If you’re choosing between a 457(b) and 403(b), consider the pros and cons of each before making your decision – or opt to contribute to both. And don’t forget that you can still open a Roth IRA on your own time.
Tips for Your Retirement Plan
- Most retirees would have trouble living off of Social Security payments alone. However, Social Security affords you extra income that can help round out your overall retirement funds. SmartAsset’s Social Security calculator will give you an estimate as to what you’ll receive from the government in retirement.
- To make sure you stay on track for retirement, it’s prudent to work with a financial advisor. An advisor matching tool like SmartAsset’s can help you find a person to work with to meet your needs. First you’ll answer a series of questions about your situation and goals. Then the program will narrow down your options from thousands of advisors to three fiduciaries who suit your needs. You can then read their profiles to learn more about them, interview them on the phone or in-person and choose who to work with in the future. This allows you to find a good fit while the program does much of the hard work for you.
Photo credit: ©iStock.com/designer491, ©iStock.com/Aero17, ©iStock.com/oneinchpunch