457 PLAN |
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What is a 457 plan?
• 457 plans are IRS-sanctioned, tax-advantaged employee retirement plans.
• They are offered by state, local government, and some nonprofit employers in the United States.
• Participants are allowed to contribute up to 100% of their salary, provided it does not exceed the applicable dollar limit for the year.
• Any interest and earnings generated from the plan do not get taxed until the funds are withdrawn.
How a 457 plan works and it's type
• Participants of these defined contribution plans set aside a percentage of their salary for retirement. These funds are transferred to the retirement account, where they grow in value without being taxed.
• Employees are allowed to contribute up to 100% of their salary. provided it does not exceed the applicable dollar limit for the year. If the plan does not meet statutory requirements, the assets may be subject to different rules.
There are two types of 457 plans:
• 457(b): This is the most common 457 plan and is offered to state and local government employees.
• 457(f): A plan offered to highly compensated government and select non-government employees.
457(b) Plan Contributions
• As of 2021, employees can contribute up to $19,500 per year. In some cases, workers are able to contribute even more.
• 457(b) plans feature a "double limit catch-up" provision. This is designed to allow participants who are nearing retirement to compensate for years in which they did not contribute to the plan but were eligible to do so. In this case, employees who are within three years of retirement age may contribute $39,000, twice the annual contribution limit.
• A lesser-known feature of the 457(b) plan is that the Internal Revenue Service (IRS) also special catch-up deferrals. The special pre-retirement catch-up deferral allows participants to make additional contributions for the three years prior to reaching normal retirement age. The special pre-retirement catch-up limit is double the normal limit.
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