What Is a 457(b) Retirement Plan?

As a public employee, you could contribute to your 457(b) retirement plan to save for your future. In many ways, a 457(b) plan is similar to a 403(b) or 401(k) plan. A 457(b) plan is offered through your employer and is designed to help you save money for retirement.

Also known as a deferred compensation plan, a 457(b) plan is commonly offered to government employees – especially those working for local and state governments.

A few examples of who might have this plan are:

• Government officials
• Police officers
• Firefighters
• Emergency medical technicians
• Public school teachers
• Those who work for a city, like sanitation workers

Using this employer-sponsored retirement account, you can contribute pre-tax dollars. Also, you won’t pay taxes on that money until you withdraw it, usually during retirement. In this way, your contributions can grow tax-deferred until withdrawals are taken.

How Does a 457(b) Retirement Plan Work?

Just as a 401(k) or 403(b) plan allows, a 457(b) retirement plan lets you contribute and build up retirement savings with tax advantage. You can contribute up to 100% of your salary to a 457(b) plan, as long as it doesn’t exceed a certain limit set by the IRS.

This amount can change from year to year. One of the drawbacks of this type of contribution is that, in some cases, if you leave your employer, you could lose the money you contributed. The reason for this is, unlike other types of qualified employer retirement plans, the money you save in a 457(b) plan is held in trust by your employer.

In general, 457(b) retirement  plans only offer annuities or mutual funds as investment options. As they are held within the 457(b) plan, both options are tax-deferred. On the flip-side, exchange-traded funds (ETFs) and individual stocks aren’t allowed in 457(b) accounts.

Comparing a 457(b) Retirement Plan With Other Retirement Plans

A major advantage of 457(b)s over 401(k)s and 403(b)s is that there are no early withdrawal penalties. As long as you have left the job where you had the account, this will usually be the case.

However, only employees in the private sector are eligible to participate in 401(k)s. If you are currently employed by a local or state government, you can’t change your retirement plan without changing employers.

Another notable difference is that a 457(b) retirement plan isn’t regulated by ERISA. Therefore, this plan has a double catch-up provision not available in 401(k) plans. The purpose of the provision is to compensate participants nearing retirement for years when they didn’t make contributions to the plan but were eligible to do so.

Because this type of plan isn’t governed by ERISA, some aspects are treated differently, including catch-up contributions, early withdrawals, and hardship distributions.

The 457(b) retirement plan and the 403(b) plan are also very similar. In one example that shows some differences, assume you decide to leave your job. This is known as “separation from service.” While you are looking for another job after a separation, you may find yourself without an income (assuming that you aren’t heading into the ‘retirement red zone‘ just yet).

A 457(b) account allows early withdrawals without penalties. In contrast, if you have been saving in a 403(b), you will face a 10% penalty surtax on any distribution you take before you reach 59.5.

How Do I Manage My 457(b) Retirement Plan After I Retire?

When you retire, you have a variety of options for distributions.

• You can withdraw part or all of your 457(b) plan funds when you retire or if you leave your job before retirement.
• Keep in mind that a distribution of all of your funds from your 457(b) plan will likely be fully taxable.
• A 457(b) can be rolled over into any other retirement account such as a traditional IRA, 401(k), 403(b), or another 457 governmental plan.
• You can contribute to both a 457 plan and a Roth IRA if your earned income is at least equal to your IRA contribution.
• All money withdrawn from a 457(b) is taxable as ordinary income in the year it’s removed.
• There is no 10% penalty for withdrawing money before you turn 59.5, as long as you are retiring or ending your employment.
• Withdrawing funds before age 59.5 may be subject to tax penalties.
• The minimum distribution must be taken at age 72.

Tips for Planning Your Retirement

Financial security is an important foundation of a successful retirement. The decisions and planning that you do today will have a direct impact on tomorrow.

To that end, what should you keep in mind as you plan for retirement? Here are a few questions to think about as a starting point:

• What income will you need to retire comfortably?
• Will you have enough money to last for your entire retirement?
• How will you preserve and protect the money you have accumulated?
• How will fluctuations in the market affect your money?
• What do you have for a financial plan for the future?
• Are you taking advantage of tax deferral to grow your retirement savings, if you are behind?
• What risks are associated with your current investments?
• Have you thought about taxes, healthcare expenses, long-term care, and other factors in your financial plan?

If you are a public employee approaching retirement, there may be options available to you in regard to your 457(b) retirement plan going forward.

To explore them, you may want to seek out the assistance of an experienced financial professional. They can discuss your needs and goals, and help you analyze your entire financial picture. The end goal? To help you make well-informed and confident decisions about your financial future.

Are you looking for someone to help you with your retirement what-ifs? For your convenience, many independent financial professionals are available at SafeMoney.com and are ready to assist you. Use our “Find a Financial Professional” section to connect with someone directly and discuss your situation. Should you need a personal referral, please call us at 877.476.9723.