Everything You Ever Wanted to Know About 457 Plans
Through the years working with you, our clients, we have had the privilege to assist many investors with crafting a sound investment strategy with their employer-sponsored retirement plan (ESRP) known as a 457(b). A 457(b) plan is one of the most popular savings plans in the United States. It is a defined contribution program offered by local governments, state governments, and some nonprofit employers.
The eligible employees set aside a predetermined percentage of their salary for the 457(b) plan. Some employees even contribute up to 100% of their salary, provided that the amount does not exceed the set annual dollar limit.
Just like the 401(k) plans, employees who contribute to the 457(b) plans get tax advantages; because the money is sent to the 457(b) savings accounts before tax. Also, the accumulated funds do not cause a tax situation until the withdrawal date.
457(b) plans are similar to the 401(k) plans, except that the 457(b) plans are non-qualified (do not meet the Employee Retirement Income Security Act guidelines), and they offer penalties for cashing out early.
Here’s everything that you need to know about the 457(b) plans:
History of the 457(B)
457(b) was officiated on December 6, 1978, when section 457(b) was created and included in the Internal Revenue Code. This plan came around the same time when the 401(k) section was added to IRC.
Before then, municipal employers received some form of a deferred compensation plan, but the practice was not common, nor was it officiated. Also, most of the municipal employers who used the deferred compensation embraced the 401(k) contributions more, even though 401(k)s were made for the taxable employees,
In 1986, the Tax Reform Act prohibited establishing more 401(k) plans, reinforcing the growth of the 457(b) plans. However, the municipal employers who were still using the 401(k) programs were allowed to continue using them, alongside the newly reinforced 457(b) plans.
The subsequent tax acts continued to reinforce the 457(b) more, and that’s how 457(b) contribution plans became popular in every corner of the country.
Stats About the 457(B)
The 457(b) popularity has been increasing with time, and so is the maximum limit. Currently, the 457(b) assets are valued at $900 billion, whereby $400 billion belongs to the state and local governments. Also, the current salary deferral limit for the 457(b) plan stands at $19,500, a notable increase from $16,500 in 2010.
The current catch-up contributions for people aged above 50 years and above currently stands at $6,500, an increase from $5,500 in 2010. By using these statistics, the overall maximum limit for deferred contribution in 457(b) is $26,000, a notable increase from $22,000 a decade ago.
How the 457(B) Works
457(b) is an employer-sponsored plan. If your employer offers this plan, predetermined amounts will be taken from your paycheck on a pre-tax basis, thus, lowering your taxable income.
You can decide to invest your contributions in mutual funds, whereby the interest and the earnings remain untaxed until you withdraw. Should you choose to withdraw or transfer the funds from your 457(b) savings account, then you may pay a 10% penalty because this savings plan prohibits the withdrawal of funds until the employee is 59.5 years.
However, you can withdraw the funds without penalty if you retire early or leave your job even when your age is below 59.5 years. You can also withdraw the funds in case of unforeseeable emergencies, provided that you prove them.
Every employee under this plan has the right to choose any amount that they will defer from their salary for the savings. However, the accumulative deferred compensation should not exceed $19,500 per year, as earlier mentioned.
Features and Benefits to A 457(B)
Here are some of the features that you should be aware of:
Some employers can decide to match the amount that you contribute to your 457(b) account up to a specific limit. If you are lucky enough to have such an employer, then you should take the chance to contribute as much as the match.
For instance, assuming that your employer is willing to offer a 50% match and you contribute $100 every month, then your employer will contribute $50 every month as well, and this can be a significant boost to your savings.
Employees can contribute up to 100% of their income. However, there is a set maximum limit that stands at $19,500 per year as of 2021. If you are more than 50 years old and your employers offer the matching contributions, your limit can have an additional $6500.
You may not entirely rely on the 457(b) plan for your loan. This is because the loan may violate the events under which the plan requires the participants to distribute the funds. Generally, the funds’ distributions can be done in the following circumstances:
Attainment of 59.5 years
Distribution of small amounts
Here are some of the benefits that participants of the 457(b) savings plan enjoy
Special Catch Up Provision
Not everyone starts to save for the future while still young. Some people only get the opportunity to do so when they are aged. The 457(b) plan provides equal savings plan to all the participants, irrespective of their age.
There’s a special catch-up provision which can be a lifesaver to most aged people. It allows the people aged 50 years and above to save an additional on top of the standard maximum value to make the most savings.
457(b) contributions are pre-tax, which means that the participant saves the funds before the tax deductions. This tax favor does not only increase the amount of contributions that the participant can make but also reduces the amount of taxable income. Besides, the funds in the savings plan are not taxed no matter how long they remain in the account.
Multiple Savings Options
With the 457(b) plan, you can invest for your future in terms of stocks, bonds, and other money market equipment. You only need to research the best savings options so that you can make an informed decision.
Make Smart Investment Decisions
Retirement savings require well thought plans – and you are ahead because you took time to read this! If you are an entrepreneur, investor or employee and are interested in the 457(b), get the information you need and seek professional guidance.
You can rely on Infinium Investment Advisors for advice and more information regarding 457(b) retirement saving plans. Contact our team today, and we will be glad to walk you through the saving and investment journey.