The 457(b) plan is a retirement plan supported by employers and local and state governments, as well as some organizations subject to tax under the Internal Revenue Code 501(c). It is a deferred compensation plan that allows you to contribute to a retirement account and protects these contributions from current taxes.
Things to Consider
In 2021, you can contribute up to $19,500 per year to a 457(b) plan ($20,500 in 2022), although total contributions (including those from the employer) cannot exceed your annual salary. If you are 50 years old or older, you can make an additional contribution of $6,500 per year, or even more if you are within three years of retirement. Contributions to a 457(b) plan grow tax-deferred, and there is no 10% early withdrawal penalty if you are no longer working for the same employer. If you leave a government job, you can roll over your 457(b) plan into a 401(k), 403(b), or another 457(b), or a new traditional IRA.
Contribution Limits for 2021 and 2022 for 457(b) Plans
Similar to the contribution limits for 401(k) plans, employees can generally contribute up to $19,500 to a 457(b) plan in 2021. This limit increases to $20,500 in 2022. Those who receive an employer matching contribution will have higher total contributions. Total contributions to a 457(b) plan cannot exceed 100% of the employee’s salary.
In 2021 and 2022, workers aged 50 and over may be able to allocate an additional $6,500 per year as a “catch-up” contribution. Workers nearing retirement may even make larger catch-up contributions. For three years prior to reaching the defined retirement age in their plan, employees can contribute less than: double the annual limit, which would be $39,000 in 2021 and $41,000 in 2022. The unused basic annual contribution limit from previous years.
Participants may not be able to take advantage of both contributions for those aged 50 and over and contributions for three years before retirement in the same year.
Benefits of Participating in a 457(b) Plan
There are several significant tax benefits for participants in a 457(b) plan. All contributions to a 457(b) plan grow tax-deferred. This means that those with plans will not pay any income tax on the contributions they make or the investment returns until they withdraw the funds. Withdrawals are taxed as ordinary income once they are made.
One thing that distinguishes 457(b) plans from other retirement plans, such as 401(k) and 403(b) plans, is the absence of a 10% early withdrawal penalty for withdrawing funds from the account before age 59 and a half. This rule applies only if you are no longer working for the same employer. This unique feature often makes the 457(b) plan more attractive than its counterparts, especially for those planning to retire early or access their retirement funds before age 59 and a half.
For more information about 457(b) plans, visit the IRS website or review Publication 4484.
Tips
To Provide Retirement for 457(b) Plans
If you work for the government and then change jobs or are terminated, you can transfer funds from your 457(b) account to a new employer’s 401(k), 403(b), or 457(b) plan (provided that they accept rollovers). You may also have the option to convert funds to a Traditional IRA.
Employees of taxable organizations can transfer funds to another taxable 457(b) plan that accepts rollovers, leave the funds in the plan, or take a taxable distribution if they leave their employer.
Government 457(b) plans can be modified to allow for designated Roth contributions and in-plan transfers to designated Roth accounts. This provides additional opportunities for tax-free growth of earnings.
Those considering a Roth 457 plan can use a pre-tax versus Roth tax calculator to determine the best option based on their expected tax situation in retirement.
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Sources:
- Internal Revenue Service. “IRC 457(b) Deferred Compensation Plans.” Accessed Dec. 12, 2021.
- Internal Revenue Service. “IRS Announces 401(k) Limit Increases to $20,500.” Accessed Dec. 12, 2021.
- Internal Revenue Service. “Retirement Topics — 457(b) Contribution Limits.” Accessed Dec. 12, 2021.
- Internal Revenue Service. “Retirement Topics — Catch-Up Contributions.” Accessed Dec. 12, 2021.
- Internal Revenue Service. “Topic No. 558 Additional Tax on Early Distributions From Retirement Plans Other Than IRAs.” Accessed Dec. 12, 2021.
- United States House of Representatives. “6 USC 457: Deferred Compensation Plans of State and Local Governments and Tax-Exempt Organizations.” Accessed Dec. 12, 2021.
- Internal Revenue Service. “Rollover Chart.” Accessed Dec. 12, 2021.
- Internal Revenue Service. “Comparison of Tax-Exempt 457(b) Plans and Governmental 457(b) Plans.” Accessed Dec. 12, 2021.
Source: https://www.thebalancemoney.com/plan-contribution-limits-3995245
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