What is a Roth 457(b) Plan?
A Roth 457(b) plan is a voluntary retirement plan. Technically, it is a supplemental tax-deferred retirement savings plan. The Internal Revenue Service allows employees of school districts, local governments and tax-exempt organizations to take part in a Roth 457(b) plan.
With a Roth 457(b), you contribute on an after-tax basis. There is no current tax break. The major advantages are that contributions and earnings grow tax free and withdrawals are tax free as long as the account has been held at least 5 years, and you have a qualified distribution event.
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.
What types of investment choices are available?
Kades-Margolis offers a retirement program for PSEA members– Money by Design. This program offers members a customized Roth 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.
When will I be eligible to receive distributions?
You are eligible receive distributions from the plan when you retire, separate from employment at any age, or die. To avoid any penalties, you must also have held your Roth 457(b) plan for five years. With a Roth 457(b) plan, if you are still working, you cannot make a penalty-free withdraw until you reach 70 ½. If you make a withdrawal before then, you will incur a 10% IRS penalty. Your plan also allows for unforeseeable emergency withdrawals without penalty. Like traditional 457(b) plans, Roth 457(b) plans also have Required Minimum Distributions (RMDs) starting at age 70 ½.
However, when you retire or after you leave your employer, you may choose to roll over the Roth 457(b) account balance into a Roth IRA to avoid RMDs. Also, opening and contributing to a Roth 457(b) does not affect your eligibility to open and contribute to a traditional IRA or Roth IRA.
What is an unforeseeable emergency?
Federal laws 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.
How can you receive your payments?
When you are eligible to withdraw payments from your Roth 457(b) plan, you have several choices. You can take the value of your account in a lump sum or as a periodic income. You also can leave the assets in the plan (for payment later) and continue to earn investment returns. Also, if you are eligible, you can rollover your Roth 457(b) to a Roth IRA if you choose to do so.
Roth 457(b) Plan Highlights and Advantages
- Your employer payroll deducts your contributions on an after-tax basis
- If you meet eligibility requirements, your distributions are tax free when received
- You can contribute up to the maximum annual limits to both a 403(b) and 457(b) plan, thus increasing your savings potential
- No IRS 10% penalty tax when you separate from service at any age and
To decide if a Roth 457(b) is right for you, please consult a Kades-Margolis Financial Advisor for information specific to your situation.
Please call (800) 433-1828, ext. 4, or click this link, fill out the form and submit. We will have one of our financial advisors contact you.