What is a 457(b) Plan?

The 457(b) scheme is a tax-advantaged and non-qualified retirement program that is offered primarily for employees of local and state authorities and specific non-profit organizations. A “b” designation indicates it’s a deferred compensation plan in which employees are able to contribute a percentage of their earnings in a pre-tax manner.

Here are some key features of a 457(b) plan:

Eligibility

457(b) plans are usually available to government (state or local) employees and employees of certain non-profit organizations.

Contribution Limits

Contribution limits for the 457(b) plans are the same as those for the 401(k) scheme. The limit for 2024 is $23,000, with the possibility of a catch-up bonus of $7500, which is available to participants 50 or older.

Tax Treatment

Contributions to the 457(b) program are pre-taxed, meaning they lower the participant’s tax-deductible income for the entire year. The plan funds are tax-free until they’re withdrawn.

Withdrawal Rules

Withdrawals from a 457(b) scheme are typically permitted when the employee is retired, separated from the employer, or faced with an emergency. In contrast to other retirement plans, there is no penalty for early withdrawal when funds are withdrawn prior to the age of 59 1/2, but withdrawals are subject to normal income tax.

Rollover Options

When they are separated from service, plan participants can transfer the benefits of their 457(b) plan to another retirement account, such as an IRA, 401(k), or a different 457(b) account.

Catch-Up Contributions

Apart from the usual catch-up contributions available to those 50 or older, a 457(b) policy also comes with the benefit of a catch-up plan, which allows plan participants to contribute as much as double the annual limit for the three years preceding the plan’s typical retirement age.

Investment Options

The 457(b) program generally offers participants a variety of investment options, including annuities, mutual funds, and occasionally individual securities.

Differences from 401(k) and 403(b) Plans

It is a 457(b) program that is identical to a 401(k) or 403(b) plan. However, it’s made for a specific group of employees (government and certain non-profit organizations) and has distinct rules for withdrawals and catch-up contributions.

The 457(b) plan can be a great retirement savings option for eligible employees. It provides tax-deferred growth and flexibility in withdrawal options.

Is it a 457(b) Qualified Retirement Plan?

The HTML0 457(b) plan isn’t an eligible retirement plan; it’s a non-qualified deferred payment plan.

457(b) Plan Withdrawal Rules

The withdrawal rules for a 457(b) plan are as follows:

No Early Withdrawal Penalty:

Contrary to other retirement plans, there is no penalty for early withdrawal when you take distributions from the 457(b) plan prior to age 59 1/2. However, withdrawals are subject to the normal income tax.

When Withdrawals Are Allowed:

Separation From Service: The employees are able to withdraw their funds following retirement or after leaving their employer.
Unpredictable Emergency: Refunds are possible in the event of extreme financial hardship caused by events such as accident, illness, or property damage, but not for more normal financial necessities such as college or home purchase costs.
required minimum distributions (RMDS): You have to begin making RMDS in the 457(b) plan before April 1st of the year when you turn 73.

Rollover Options:

After you have separated from the service, you can transfer your 457(b) balance to other retirement plans, such as an IRA, 401(k), or a different 457(b) plan. This allows you to put off taxes on the amount.