A 457(b) plan is a retirement savings option for certain government and nonprofit employees. It lets you contribute part of your salary before taxes, lowering your taxable income while saving for retirement. Your funds grow tax-deferred, meaning you won’t pay taxes on them until you withdraw the money, usually after you retire.
How does the 457(b) plan work?
This plan works a lot like a 401(k), but with a few key differences. You contribute money through payroll deductions, and those funds get invested to grow over time. The IRS sets annual contribution limits, and if you’re 50 or older, you can take advantage of catch-up contributions. One of the benefits of a 457(b) is that you can withdraw money before 59½ without facing the usual early withdrawal penalty—though it’s still taxable.
What’s the difference between a 401(k) and a 457(b)?
Both plans help you save for retirement with tax-deferred contributions, but there are a few differences:
- Eligibility: 401(k)s are usually offered by private companies, while 457(b)s are for government and nonprofit employees.
- Early Withdrawal: A 457(b) plan doesn’t have a 10% penalty for withdrawals before 59½, but 401(k)s do.
- Employer Matching: 401(k)s often come with employer matching, while that’s less common in 457(b)s.
- Contribution Limits: Both have similar limits, but some 457(b)s offer a special catch-up option for employees nearing retirement.
What’s the difference between a governmental and non-governmental 457(b) plan?
There are two types of 457(b) plans: governmental and non-governmental. Here’s how they differ:
- Governmental 457(b): Available to state and local government employees. The funds are held in trust for you, making them safer. You can also roll over your money into other retirement accounts, like an IRA or 401(k).
- Non-Governmental 457(b): Offered to certain nonprofit employees. The employer owns the assets until they’re distributed, meaning creditors might claim them if the employer runs into trouble. Rollover options are also limited to other non-governmental 457(b) plans.
What are the 457(b) withdrawal rules?
Withdrawals from a 457(b) plan are taxed as income, but you don’t have to worry about the early withdrawal penalty before age 59½. This makes it more flexible than other retirement accounts. Still, there are some important rules:
- Retirement or Separation: You can usually withdraw funds once you retire or leave your job.
- Required Minimum Distributions (RMDs): Starting at age 73, you’ll need to take minimum distributions.
- Unforeseeable Emergency: In cases of financial hardship, you might be able to withdraw money early.
- Rollovers: Funds from a governmental 457(b) can be rolled into other retirement accounts, but non-governmental 457(b) plans have fewer rollover options.
Knowing these rules helps you make the most of your 457(b) plan while avoiding unnecessary taxes.