Roth individual retirement accounts and 457 deferred-compensation plans both offer tax-advantaged growth for long-term investors. However, they are structured quite differently. Roth IRAs are set up by individual investors, while 457 plans are administered through specific types of employers. The two types of plans also offer different tax benefits. They aren't mutually exclusive. You can make contributions to both types of plans if you qualify.
457 plans are offered by state and local governments, as well as certain non-profit organizations. To participate, you'll need to work for an employer that is both qualified and willing to offer a 457 plan.
Any worker can contribute to a Roth IRA as long as he has compensation and his modified adjusted gross income (MAGI) falls below certain limits. The amount you can contribute is phased out over a range. For 2018, to make the maximum allowable Roth contribution a single filer's MAGI must be under $120,000, although contributions are not disallowed until $135,000. If you're married and filing jointly, your MAGI must fall below $189,000 to make the maximum contribution, with contributions prohibited at a MAGI of $199,000 or more.
One of the major drawbacks for a Roth IRA versus a 457 plan is the amount you can contribute. As of 2018, you can contribute up to $18,500 to your 457 plan or $24,500 if you're 50 or older. Your 457 plan contribution limit isn't cumulative with other retirement plans, so you could also max out your 401(k) or 403(b). Roth IRAs only allow contributions of up to $5,500 or $6,500 if you're 50 or older. Your Roth IRA contribution limit is also reduced by any money you put into a traditional IRA.
Just like with a 401(k) plan or other pre-tax retirement plan, your 457 contributions reduce your taxable income in the year you make them. Money in the account grows tax-deferred until you withdraw it, at which time both earnings and contributions are taxable income.
Taxation on Roth IRAs works in reverse. You won't get a tax deduction on any of your contributions. However, when you make a qualified withdrawal the money comes out tax free. Qualified withdrawals require that you be at least 59 ½ or permanently disabled, and the Roth IRA must be at least five tax years old. You can also take out up to $10,000 for a first home or withdraw funds as a beneficiary of an inherited IRA.
Early Withdrawal Penalties
One advantage 457 plans have over other tax-deferred retirement plans, including Roth IRAs, is that you can withdraw your money anytime without paying an early withdrawal penalty. Roth IRAs, on the other hand, impose a 10 percent early distribution penalty on the taxable portion of nonqualified withdrawals. However, you are allowed to take back any of your Roth contributions anytime, both tax free and penalty free. Even when you take an early withdrawal of earnings, which count as taxable income, you can avoid the penalty if you qualify for an exception, like higher education expenses, health insurance when you're unemployed or medical expenses exceeding 7.5 percent of your adjusted gross income.
- Pre-Tax Vs. Post-Taxable IRA Contributions
- Tax Differences in a Roth 401(k) Vs. a Roth IRA
- Pre Tax Vs. Roth 401(k)
- Closing a 457 Plan
- Can I Contribute to My IRA Annuity If I Already Contribute to a SIMPLE IRA?
- Can I Have Two 401(k) Plans at the Same Time?
- IRA Withdrawal Options
- The Tax Differences for SIMPLE IRA & 403(b)