457(b) Retirement Plan

A 457(b) Retirement Plan is a tax-advantaged retirement savings plan available to employees of state and local governments, as well as certain non-profit organizations. Named after Section 457(b) of the Internal Revenue Code, the 457(b) plan allows employees to defer a portion of their income into a retirement account, which grows tax-deferred until withdrawal.

Unlike other retirement plans, 457(b) plans offer more flexibility in terms of early withdrawals. Participants can withdraw funds without penalty if they separate from their employer regardless of age, though they are still subject to income taxes. The plan is designed to help workers in the public and non-profit sectors save for retirement in a tax-efficient way.

Key Facts

• Eligibility:
  • Typically offered to employees of state and local governments, certain non-profit organizations, and some other tax-exempt entities.
  • Some 457(b) plans may have additional eligibility requirements, such as a minimum service period.
• Contribution Limits (2024):
  • A $23,000 employee contribution limit annually for employees under the age of 50.
  • Employees aged 50 or older can make an additional $7,500 catch-up contribution.
• Tax Treatment:
  • Traditional 457(b): Contributions are made pre-tax, lowering current taxable income. Taxes are paid when funds are withdrawn in retirement.
  • Roth 457(b): Some plans offer a Roth option where contributions are made with after-tax dollars, but withdrawals, including earnings, are tax-free if conditions are met.
• Withdrawal Rules:
  • Participants can withdraw funds penalty-free once they separate from their employer, regardless of age (unlike 401(k)s or (403(b)s, which generally impose a penalty for early withdrawals before age 59½).
  • Withdrawals are subject to regular income tax, whether the funds are from pre-tax or Roth contributions.
  • Required Minimum Distributions (RMDs) must begin at age 73.
• Investment Options:
  • Investment options typically include mutual funds, target-date funds, and other managed portfolios, depending on the plan provider.
  • Participants can allocate their contributions based on their risk tolerance and retirement goals.
• Loans and Hardship Withdrawals: Many 457(b) plans allow loans or hardship withdrawals under certain conditions, but the availability of loans and the terms may vary by employer and plan.

1. How is a 457(b) plan different from a 401(k) or 403(b)?

The key difference is that a 457(b) plan allows penalty-free withdrawals if you separate from your employer, regardless of age. In contrast, 401(k) and 403(b) plans impose a 10% penalty for early withdrawals before age 59½, unless specific exceptions apply.

2. Can I contribute to both a 457(b) plan and a 401(k) or 403(b) plan?

Yes, you can contribute to both types of plans, as long as you meet the eligibility requirements for each. The contribution limits are separate for each plan, so you can maximize your retirement savings across both accounts.

3. Can I access my 457(b) funds before retirement?

Yes, 457(b) plans allow penalty-free withdrawals when you separate from your employer, regardless of your age. However, the funds will be subject to regular income taxes upon withdrawal.

4. Can by employer match my contributions to a 457(b)?

Yes, some employers may offer matching contributions to your 457(b) plan, though this various depending on the employer. The total contribution limit includes both employee and employer contributions.

5. Are 457(b) plans tax-deferred?

Yes, contributions to a traditional 457(b) plan are tax-deferred, meaning you do not pay taxes on the contributions or earnings until you withdraw the funds in retirement. Roth 457(b) contributions are made with after-tax money, but withdrawals are tax-free if conditions are met.