What is a 457 Plan?
457 Plan is a tax advantaged retirement contribution plan sanctioned by IRS and covers only eligible employees like state and local governmental employees, non-federal employees, employees of tax-exempt entities like charitable institutions and NGO’s to give them the retirement benefits. Participants set aside the percentage of salary (upto 100% of the salary subject to dollar limit per year) and make contributions to the approved plan.
Features of 457 Plan
The following are some features:
#1 – Retirement Plan for Non-Federal Employees
The highlight point is it is only for eligible employees and eligible employees state and local governmental employees, the non-federal employees, employees of tax-exempted entities, employees of non-profit or non-governmental organizations that are associated with the government.
#2 – Tax-Advantaged Plan
Contributions to these plans are not taxed at the time of making contributions. The amount is taxed at the time of withdrawal from the account.
#3 – 100% Contribution Limit
The employees can contribute up to 100 percent of the salary. Provided the contribution does not exceed the applicable dollar limit.
#4 – Double Limit Contribution Provision
The employees who were eligible to contribute to the plan but didn’t contribute and are near to the age of retirement i.e., minimum three years before the retirement age, have the option to contribute at twice the limit to get benefited.
#5 – Other Features
- Liberty to choose the type of investment fund to invest the contributions in the retirement account.
- Lower taxable income due to tax advantage of transfer to the plan.
- Secures future financial needs.
- The option of transfer the amount in a retirement account to a new employer in case of a change of job.
- Option to choose the pre-tax or post-tax contributions to be made.
How Does the 457 Plan Works?
- Eligible employers like local and state governments give the offer to employees for contribution to 457 plans and interested employees to communicate to the employers for contribution to the plan.
- The employer needs to register with the authority to make contributions in an approved plan and need to select the type of plan in which it wants to contribute. The employee makes a contribution of a certain percentage of their salary, and it may go up to 100 percent of the salary subject to a dollar limit.
- Then contributions are transferred to the special account and are invested in securities. They may be safe securities or certain risk-bearing securities, and money grows without tax through investment. The employee can withdraw after retirement. If the amount is withdrawn before retirement, it is taxable at the normal rates.
Types of 457 Plan
There are two types which are as follows:
#1 – 457 (b)
It is available for the state or local government employees. Some employees of non-profit organizations are also eligible for this plan. It has a contribution limit of $ 19000 per year for employees.
#2 – 457 (f)
It is available for Non-federal employees like employees who are associated with the government but are not termed as governmental employees, employees of NGO, tax-exempt entities, etc. the limit of contribution can be up to 100 percent of the salary. There are certain legal and compulsory requirements for this plan. Deviation from rules leads to problems, penalties, and loss.
- Money compounded in 457 plans can be withdrawn at the time of retirement so as to enjoy the retirement benefits. Early withdrawals are also permissible without any penalty. Withdrawals are taxed at normal rates. One can withdraw at any time at any age from the plan without any penalty.
- Withdrawal is permitted only in case of emergency and with prior permission from the employer. Emergency withdrawals include only medical expenses, funeral expenses, or in case of damage to the property. Only the amount necessary for an emergency will be allowed to withdraw.
- The limit for the 457 (b) is $ 39000 per year. This is the maximum limit allowed as a contribution. If the age of an employee is greater than 50 years, then the additional $ 6000 is allowed as a contribution apart from the $ 39000 limit. Also, if the employee enters the 457 (b) before three years of the age of retirement limit is double than the current limit of $ 39000.
- In the case of 457 (f), the limit is maximum up to 100 percent of the salary, but this is subject to the dollar limit for the year.
457 Plan vs 401(k) plans
- 457 plans are non-qualified plans, whereas 401 (k) plans are qualified plans.
- 457 plans are offered by state or local government and some tax-exempt employers, whereas 401 (k) plans are offered by private employers.
- Withdrawals under 457 plans before retirement are permitted without any penalty, and withdrawals under 401 (k) plan before retirement are permitted subject to a 10% penalty.
- Employee retirement income security act provisions and benefits are applicable to 401 (k) plans and not to 457 plans.
- They are tax advantage plans as contributions are not taxed.
- Withdrawals from 457 plans are permitted without any penalty.
- The contribution limit is up to 100 percent of the salary.
- Beneficial for non-federal employees and employees who are associated with the government.
- Withdrawals are permitted at any age at any time.
- Special features for contributors near retiring age.
- They are a non-qualified plan.
- 457 plans are not covered by the Employee retirement income security act.
- Withdrawals are permitted only for defined emergencies.
- The total limit of contribution also includes the employer contribution, if any.
457 plans are the tax-advantageous plans offered by the local and state government to benefit the non-federal employees. It is also offered by the tax-exempt entities for their employees. This plan is a non-qualified plan hence does not cover the provisions of the employee retirement income security act.
The withdrawals from the plan are permitted only for defined emergencies. The contribution limit under this plan can be up to 100 percent of the salary. The withdrawals are not subject to any penalties, and there are also special features of additional contribution and double contribution for the employees entering the plan at the age nearing to the retirement.
This has been a guide to what is 457 plan and its definition. Here we discuss top features, types, and how does this plan work along with its withdrawal requirements and advantages. You may learn more about financing from the following articles –