Your parents might be approaching retirement and talking about their cushy pensions they're going to get, but chances are you're going to have to take charge of your own retirement. If you're eligible, you can max out your 457 plan and your individual retirement account so you're not leaving your later years to chance.
To contribute to a 457 plan, you must work for a state or local government group or tax-exempt organization that offers one. Your contributions can't exceed your annual compensation from that employer. For example, if you only earn $10,000 working part-time for a local government agency, you can't contribute more than $10,000 even if you have other income. With an IRA, you still need compensation to contribute. But the money can come from any job, including self-employment. Plus, you can also qualify with taxable alimony received.
457 Tax Treatment
Contributions to 457 plans come directly out of your paycheck. When your employer gives you your W-2 at the end of the year, your taxable income won't count the money you've deferred into your account unless you've put the money in a Roth 457. Let's say you're making $58,000 a year. If you put $8,000 in a traditional 457 plan, your W-2 will only show $50,000 of taxable income. If you put the money in a Roth 457 plan, you don't get a tax deduction for your contributions, but you will get your money out tax-free at retirement.
Deducting IRA Contributions
If you're participating in your 457 plan, you might not be able to deduct your traditional IRA contributions. Your 457 counts as an employer-sponsored plan, so if your modified adjusted gross income exceeds the limits, your IRA contribution deduction disappears. As of 2013, that means if you're married filing jointly and your MAGI exceeds $95,000, your maximum deduction starts dropping. At $115,000, it disappears completely. Let's say your MAGI is $103,000. Because you're 40 percent of the way from the start of the phase-out range of $95,000 to $115,000, then 40 percent of your maximum IRA contribution for the year is no longer deductible. With the maximum 2013 contribution at $5,500, that means you can still deduct up to $3,300, or 60 percent of your limit.
The contribution limits for IRAs and 457 plans are completely separate, which means you can max out your contributions to both accounts. For example, as of 2013, you can contribute up to $5,500 to your Roth IRA if you're under 50. You can put up to $17,500 in your 457 account. Plus, the total of your 457 plan contributions plus your employers contributions on your behalf can't exceed $51,000.
Benefits of Both
If you can afford it, maxing out both retirement accounts lets you maximize your tax benefits. The more money you can sock away each year, the more you can take advantage of the tax-sheltered growth. If you're in a higher tax bracket than you anticipate being in when you retire, you also benefit from sticking more money in your traditional IRA and 457 plan because of the extra tax deductions. If the opposite is true, getting more money in your Roth IRA -- and a Roth 457, if your employer offers it -- lets you put in more after-tax dollars so you can have more in tax-free distributions at retirement.
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