What is a 457(b) Plan?
A 457(b) plan is a voluntary retirement savings plan. As an eligible employee, the plan allows you to defer compensation on a pretax basis through regular payroll deductions. The money you save in these accounts grows tax-deferred until withdrawn.
The basic features of a 457(b) plan are the same as a 403(b) plan:
- Pretax contributions
- Tax-deferred growth
- Portability if you leave your job
- The IRS requires the employer to have a written document governing the retirement plan and its features
- The employer providing the plan must assume compliance responsibilities
- Salary reduction agreements are required
However, there are some major differences:
- Assets are held by your employer in a contract or trust, which, by law, protects your 457(b) plan assets from your employer’s creditors
- No IRS 10% penalty for early distributions from the 457(b) plan upon separation from service, regardless of age
- Your employer does not have to offer the 457(b) plan to all employees
- Different investment options may be available in the 457(b) plan
You Control a 457 Plan
A defined contribution plan like a 457(b) plan allows you to supplement your defined benefit plan with your own savings. With a 457(b) plan, you may contribute to the plan, up to allowable limits, on a pretax basis from your paycheck. You choose the investments from the choices your plan offers. If you decide to invest in securities, you assume the investment risk. The amount you save for retirement will depend on the amount you contribute. The other important factor is the performance of the investment choices you make.
If you leave your job, you can roll over your balance to another employer-sponsored retirement plan, like another employer’s 457(b) plan (as long as it accepts rollovers). You also can roll it into an IRA.
Frequently Asked Questions
How much salary may I defer?
You decide how much you want to invest. The maximum amount you may defer is the lesser of 100% of included compensation or up to $18,000 (IRC annual maximum contribution limit for 2015).
If you qualify, you may contribute higher amounts (up to twice the normal annual maximum) under a retirement catch-up provision. This provision is available during the three years before the year you reach normal retirement age. If you’re age 50 or more you may contribute an extra $6,000. Maximum contribution limits may change in future years as determined by the IRS. Note: you cannot use both catch-up provisions in the same year.
How will you receive your benefits?
When you are eligible to withdraw from your plan, you may take the value of your account in several ways. These include a lump sum, as a periodic income, or you can leave assets in the plan and continue to earn investment returns. You also can rollover your account to an eligible retirement plan.
When will I be eligible to receive distributions?
You are eligible to receive distributions from the plan when you retire, separate from employment at any age, or die. Your plan may also allow for unforeseeable emergency withdrawals. With 457(b) plans, the IRS taxes distributions as ordinary income. However, if you are still working, you cannot withdraw funds from a 457(b) until you are 70 ½ or older.
What is an unforeseeable emergency?
Federal rules define an unforeseeable emergency as a severe financial emergency resulting from illness, accident, or property loss resulting from circumstances beyond your control. Buying a house or sending a child college does not qualify as an unforeseeable hardship.
What are Required Minimum Distributions (RMDs)?
When you reach age 70 ½, the IRS requires you to withdraw at least a minimum amount each year from your 457(b) plan. You must pay ordinary income taxes on the taxable portion of your withdrawal.
If you don’t take your RMD, you will owe a 50% federal penalty tax on the difference between the amount you withdrew and the amount you should have withdrawn. And you will still have to withdraw the required amount and pay any income tax due on the taxable amount.
When must you take RMDs?
You must withdraw your RMD for a given year by December 31 of that year. You can do it either in a lump sum or in installments. You must take your first RMD by April 1 of the year following attainment of age 70 ½. If you decide to delay taking your first RMD until the next year, however, you’ll have to take two minimum distributions during that calendar year. This may put you in a higher tax bracket for that year, significantly increasing the tax you owe. What types of investment choices are available?
Today, Kades-Margolis offers a program for PSEA members – Money by Design. This program offers members a customized 457(b) plan. Money by Design offers you more than 400 mutual funds, representing more than 20 fund families. The program allows you move between funds, fund families and a fixed-interest annuity option at no extra charge.
Working with a financial advisor may help you choose investments that best meet your financial objectives, based on your personal investment objectives and risk tolerance. You should consider the investment objectives, risks, and charges and expenses of the funds offered carefully before investing.
Separation from Service
When you separate from service, you can rollover or transfer the funds into an approved retirement account or “cash out” and take a lump sum payment. Taking the cash can be tempting, but also costly due to the taxes charged on the withdrawal. Consult your financial advisor to discuss which option best fits your personal situation.
If you would like more information about a 457(b) plan, please call
Kades-Margolis at (800) 433-1828, ext. 4, or click this link, fill out the form and send. We will have one of our financial advisors contact you.