A 457(b) plan is an employer-sponsored plan that provides deferred compensation and retirement benefits to employees of school districts, state and local governments and tax exempt organizations. The Internal Revenue Service (IRS) created the 457(b) code and the plan’s tax-advantaged benefits.
How it Works
A traditional 457 plan allows participants to make contributions on a pretax basis. Plan contributions and growth, dividends, or earned interest will accumulate tax-deferred until you withdraw funds, usually at retirement. Then income is taxed only as withdrawn and generally taxed as ordinary income. A 457(b) plan is a nonqualified compensation plan that works very much like other retirement plans. However, there are several important differences.
A major difference is the 457(b) plan’s distributions rules. If you retire, or leave the service early at any age, you have no IRS 10% penalty for early withdrawal. However, if you continue to work, you cannot take out the funds until you are 70 ½ years old.
You can also make contributions to both a 457(b) and a 403(b) plan if you wish. Your contribution or paid premiums will be deducted from your paycheck before taxes are taken out by your employer. The money is forwarded to the custodial investment firm. Not all employers offer a
457(b) plan, so please check with your employer to see if this option is available to you.
What is a Roth 457(b) Plan?
A Roth 457(b) plan also 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 five years, and you have a qualified distribution event.
Types of Plans
- Traditional 457(b) plans
- Roth 457(b) plans
How much salary may I defer in a 457(b) or Roth 457(b) plan?
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 called Money by Design. This program offers individuals a customized 457(b) or 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 from a Roth 457(b) plan?
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) like other qualified retirement plans, 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 Individual Retirement Account (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.
To decide if a 457(b) or Roth 457(b) plan is right for you, please consult with a Kades-Margolis Financial Advisor for information specific to your situation. Please call (800) 433-1828, ext. 4, or click here, fill out the form and submit. We will have one of our associates contact you.