Individual retirement accounts and 457 plans are both defined-contribution plans, which means that you make annual contributions and the amount that your investments grow or shrink is the amount of money that you can take out in retirement. Both plans offer tax-sheltered growth, which gives both types of plans an advantage over taxable investment accounts because you don’t have to pay taxes each year as the money grows in the plan. The contribution limits for 457 plans and IRAs are separate, so if you’re eligible to contribute to both a 457 plan and an IRA, then you can have both types of plans.
Eligibility for 457 Plans
The only types of employers who can offer 457(b) plans are state and local governments and charitable organizations. If you don’t work for this type of employer, then you’re not eligible to contribute. In addition, your employer has to set up the 457(b) plan for its employees; you can’t set up your own 457(b) plan.
Eligibility for IRAs
To contribute to any type of IRA, you must have taxable compensation during the year. This can include a salary, wages or self-employment income but not investment income or interest. To contribute to a Roth IRA, your modified adjusted gross income must be below the annual limits for your filing status. For traditional IRAs, you must also be younger than 70 ½ years old. In addition, if you are covered by a 457 plan you can still contribute, but you can’t deduct your traditional IRA contributions on your taxes if your income is too high.
Contribution Limits for Plans
As of 2018, you can contribute up to $18,500 to a 457(b) plan each year. You can also contribute a maximum of $5,500 to your IRAs each year. However, if you’re 50 or older, the contribution limits are higher – an extra $6,000 for 457(b) plans, which boosts the total contribution limit to $24,500 for 457(b) plans, and an extra $1,000 for IRAs, which bumps up the maximum contribution to $6,500 for IRAs.
The contribution limits for IRAs and 457 plans are separate. However, contribution limits for 457 plans are cumulative with 401(k), 403(b), SIMPLE plans and SARSEP plans. In addition, contribution limits are cumulative for both traditional IRAs and Roth IRAs. Therefore, any contributions you make to your Roth IRA won’t affect how much you can contribute to your 457 plan, but it will reduce the amount that you can contribute to your traditional IRA.
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