A 457(b) plan is a retirement savings plan for public employees. The 457(b) Plan offers many benefits, such as tax-deferred growth and withdrawal of funds from the account without penalty if you meet certain conditions. In this blog post, we will discuss 457(b) plans in-depth, including how they work and the pros and cons of 457(b) Plans.
What is a 457(b) Plan?
The IRS code name for the plan is “457(b).” These names are frequently shortened to “457 Plans.”
The 457(b) plan is comparable to other employer-sponsored, tax-deferred retirement plans like 401(k) and 403(b) accounts. Participants in a 457(b) plan take deductions from their paychecks to set aside money in tax-free investment accounts.
A 457(b) plan is a defined contribution plan that was initially created in 1978 as a way for two sorts of employers to offer an alternative: government and tax-exempt, non-government enterprises (such as hospitals and charities). There are certain differences between governmental and non-governmental 457(b) plans. The most significant distinction is that government-sponsored 457(b)s, like public sector 457(b)s, must be funded by the employer. By comparison, almost all non-governmental 457(b)s are not employer-funded (doing so would violate ERISA rules).
Most 457(b) plans provided by commercial firms, on the other hand, limit participation to management or high-paid workers.
A plan sponsor and administrator are assigned to each 457(b) account, with the investment alternatives accessible to participants strictly restricted to those made available by their plan.
How Does a 457(b) Plan Work?
A 457(b) retirement plan is identical to a 401(k), 403(b), or other types of voluntary profit-sharing plans. A 457(b) program is provided by your employer, and contributions are taken from your pay on a pretax basis, lowering your taxable income.
You have the option of investing the funds in mutual funds that you select from a variety of portfolios, and none of the interest or earnings is taxable until you withdraw them after retirement. Although the 457(b) plan is one of the most common, it only allows you to invest in two types of assets: annuities and mutual funds, both of which are tax-deferred.
Unlike a 401(k) or 403(b), you will not be subject to a 10% penalty if you withdraw your 457(b) retirement funds before reaching age 59½ if you quit or retire before age 59½. This is a significant distinction, which makes this sort of plan even more appealing than its competitors.
Advantages of 457(b) Plans
On a pretax basis, earnings are taken from paychecks, resulting in lower taxable income. For illustration, if you earned $4,000 per month and contributed $700 to a 457(b) plan, your taxable income is $3,300 for the month.
Employees may also choose to invest their contributions in a variety of mutual funds. Simply, any interest and earnings generated from these vehicles are not taxed until they are taken out. Furthermore, if an employee leaves early or retires before retirement age and requires to withdraw funds, there is no 10% penalty fee like there is with 401(k) and 403(b) plans.
Still, any early distribution from a 457 plan that resulted from a direct transfer or rollover from a qualified retirement plan, like 401(k), would be subject to the 10% penalty tax.
Disadvantages of 457(b) Plans
Employer-matched gifts may be taken into account toward the overall contribution amount. For example, suppose an employer contributes $10,000 to the plan. In that case, the employee can only add $9,000 more until the contribution limit is reached (unless they are allowed to utilize the catch-up option). Most government employers do not provide incentive matching.
457(b) Plan Rollover Rules & Limitations
Unfortunately, non-governmental 457(b) plans are not eligible to be rolled into any qualified retirement plans such as 401(k)s or Individual Retirement Accounts (IRAs). These resources can only be moved to a different tax-exempt 457(b) plan.
You can move your state’s governmental 457(b) money into your new employer’s 457(b), 403(b), or 401(k) plan, but only if the plan accepts them. Without incurring a 10% early withdrawal penalty, personal 457(b) money is not subject to the age 59½ withdrawal rule. Personal 457(b) money may be withdrawn (subject to income tax on the entire amount) without penalty. Another choice is to leave the money where it is if your plan permits.
Here is a summary of some government 457(b) rollover regulations:
- When you roll over funds from your 457(b) into a Roth IRA, you have 60 days to complete the transfer. If you do not follow through, the IRS will consider your money a taxable distribution.
- You can only make one rollover from a 457(b) into an IRA each year. This year-long period starts on the date you receive your 457(b) distribution. This is true for each IRA that you own, even if they are in separate accounts.
- You can’t use your distribution money to buy stocks between receiving your 457(b) payment and establishing your IRA.
It’s advised that you do a “direct rollover” with your 457(b) funds. You never get a check for your distribution in a direct rollover; rather, the money will be sent to your new IRA account directly by your 457(b) plan administrator.
457(b) Plan vs. 403(b)
Overall, 457(b) plans are comparable to 403(b) plans. They are both employer-sponsored retirement savings accounts with identical basic contribution limitations, and they use similar sorts of investment accounts to build money for retirement.
Roth IRAs and traditional retirement accounts both provide Roth options for individuals who wish to pay taxes now and withdraw funds tax-free when they retire.
The most significant distinction between a 457(b) and a 403(b) is that employer contributions to a 457(b) plan are included in the same annual limit as employee contributions. The maximum amount that an individual may contribute to a 457(b) plan is determined by taking into account contributions from both the employer and the employee.
Another distinction is that participants in a 457(b) plan may withdraw funds at any time without being penalized. They still have to pay income tax on any withdrawals but are not subject to the normal 10% early-withdrawal penalty that other types of retirement plans incur.
How to Invest in a 457(b)
Investments available in 457(b) plans are typically restricted to annuities and mutual funds. For example, you can’t buy exchange-traded funds (ETFs) or individual equities in a 457(b) account.
In practice, this may not be dramatically different from how even those with 401(k)s invest for retirement. Even if you’re in a 401(k), you’re likely to invest in mutual funds. As long as you can buy stock-based and bond-based index funds, you’ll be able to build the sort of three-fund portfolio that financial experts recommend.
Whatever portfolio structure you choose, keep in mind that when you’re younger, you’ll want to have a greater concentration of stock-based funds and gradually shift to more conservative, bond-based investments as you grow older. If you’d rather not deal with the burden and effort of managing your own money, check to see whether your 457(b) has target-date funds. These mutual funds invest in a mix of other mutual funds that change over time in order to keep you on track to your retirement goal.
If your 457(b) plan doesn’t provide the options you desire, consider redirecting some of your contributions to an individual retirement account (IRA) to boost your portfolio, as you won’t be missing out on any employer match.
IRAs provide for much larger investments than 457(b)s, but they have considerably lower contribution limits. If you want to save a lot of money for retirement, you may need to contribute at least a part of your funds to your company’s plan.
Benefits of Rolling Over a 457(b) Plan to a Precious Metals IRA
The main benefit of converting your 457(b) Plan assets into a self-directed IRA is that you have more control over the designation of your retirement funds, allowing you to make tax-free additions such as precious metals.
In an employer-funded retirement plan, like 457(b), your investment choices are more restricted than with a precious metals IRA. Furthermore, 457(b) plans to demand that you develop a vesting schedule for your account, which implies that you are only entitled to it after a specific amount of time. The self-directed IRA wins by a long shot when it comes to flexibility.
Furthermore, because 457(b) plans are subject to your employer’s commercial risks, they are at risk of being shut down. If, for example, your company files for bankruptcy, you may lose the ability to contribute to your retirement plan.
The 457(b) Plan can be a good investment, but it should not replace the 401(k). If you have both plans, make sure to fully understand how they function and what benefits each plan has. You may find that one is more beneficial for your situation than the other. However, if you are looking strictly at retirement savings with no access to employer matching contributions or tax-deferred growth, then the 457(b) Plan would be an excellent option.