Questions About 457 Retirement Plans

A 457(b) plan is a form of retirement plan similar to a 401(k) plan. However, only employees of local or state governments and some nonprofit organizations are eligible to participate in a 457(b) plan, according to the IRS. Employers determine eligibility for the plans that they provide, but many offer plan enrollment to all full-time workers. Some automatically enroll eligible employees.

How Are Contributions Made to the Plan?

A percentage of your paycheck is contributed into your 457(b) plan. Typically, a plan participant chooses the amount to be diverted in each check. Meanwhile, the employer sometimes makes a matching contribution into your account with every paycheck. The employer contribution may match the entire employee contribution or it may just represent a portion of it. Employer contributions frequently are part of 457(b) plans, but they are not required by law.

What Are the Contribution Limits?

Contribution limits on your 457(b) plan apply to the total contributions made in a year by you and your employer. The limits are periodically raised to keep up with cost-of-living increases. The limits are the same as the limits applied to 401(k) plans. In 2013, your 457(b) plan cannot receive more than $17,500 in contributions. If you are older than 50, you can contribute an additional $5,000. Some plans allow for catch-up contributions over the final three years before a planned retirement. Catch-up contribution limits in 2013 are $35,000 per year.

Are There Tax Benefits?

Contributions to a 457(b) plan are made pre-tax, before income taxes can be deducted from your income. In addition, earnings on the money in the plan build tax-deferred so that you do not have to pay taxes on plan growth in the years that it occurs. Instead, you pay income taxes on the earnings when you make withdrawals. The tax benefits allow for you to invest aggressively in your retirement without facing tax consequences before you reap the benefit of that investment.

What are Eligible Withdrawals?

You may make withdrawals from your 457(b) plan as soon as your job with the employer sponsoring the plan ends. However, employers may set terms that determine that you are not fully vested in the plan until you have worked a certain number of years there. "Fully vested" means becoming eligible to withdraw all of the money in the plan, including employer contributions. You can withdraw the contributions you make as soon as the job ends. Some plans may allow you to make withdrawals in case of an emergency.

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