What is a 457 Plan?
A 457 plan is a type of non-qualified, deferred compensation retirement plan that is sponsored by state and local government employers and some tax-exempt organizations. These plans allow employees to set aside pre-tax money for retirement, and the contributions are tax-deferred until the employee retires and begins to withdraw the money. The plans offer several advantages, including higher contribution limits than traditional 401(k) plans, the ability to roll over funds from other retirement accounts, and the ability to access the funds in the event of an emergency.
457 Plan Contribution Limits 2023
The Internal Revenue Service (IRS) sets the maximum contribution limit for 457 plans each year. In 2023, the total annual contribution limit for 457 plans is $19,500 for individuals under age 50 and $26,000 for individuals age 50 and older. The limit applies to both employee and employer contributions combined. If a participant contributes more than the limit in a given year, he or she will be subject to a 6% tax penalty on the excess amount.
457 Plan Catch-up Contributions
In 2023, participants age 50 and older are eligible to make catch-up contributions to their 457 plan. The catch-up contribution limit is $6,500, and it applies to both employee and employer contributions. Catch-up contributions can be used to help individuals save more for retirement, but the total annual contribution limit still applies. Participants must be aware of the total amount they are contributing in order to avoid any tax penalties.
457 Plan Rollovers
457 plans allow participants to roll over funds from other retirement accounts, such as a 401(k). Rollovers must be done in a direct transfer, and the funds must be deposited into the new account within 60 days. Rollovers are not subject to income tax, and they do not count towards the annual contribution limit. Participants can use rollovers to maximize their retirement savings and take advantage of the higher contribution limits available with a 457 plan.
457 Plan Withdrawal Rules
Participants in a 457 plan are able to access the funds in the event of an emergency. Withdrawals before age 59½ are subject to a 10% early withdrawal penalty and income taxes, and the funds must be withdrawn within five years of the date of the withdrawal. Withdrawals after age 59½ are subject to income taxes, but not the 10% penalty. Participants must also be aware of their plan’s vesting schedule when making withdrawals.
457 Plan Loans
457 plan participants are allowed to borrow up to 50% of their vested balance, up to a maximum of $50,000. Loans must be repaid within five years, and interest is charged on the loan amount. If the loan is not repaid within the five-year period, it will be considered a distribution and will be subject to income taxes and a 10% early withdrawal penalty. Participants should also be aware that any outstanding loans will reduce the amount of funds available for retirement.
457 Plan vs 401(k) Plans
When choosing a retirement plan, participants must decide between a 457 plan and a 401(k) plan. 457 plans offer higher contribution limits and the ability to roll over funds from other retirement accounts, while 401(k) plans offer employer matching contributions and the ability to take out loans. Ultimately, the choice between the two plans should be based on an individual’s personal needs and goals.
457 Plan Tax Advantages
Contributions to a 457 plan are made with pre-tax dollars, meaning they are not subject to federal income taxes until the funds are withdrawn. This can significantly reduce a participant’s taxable income in the current year, which can lead to lower taxes and more money in the individual’s pocket. Additionally, funds withdrawn from a 457 plan after age 59½ are only subject to income taxes, not the 10% early withdrawal penalty.
Conclusion
A 457 plan is a type of retirement plan that offers several advantages, including higher contribution limits than traditional 401(k) plans, the ability to roll over funds from other retirement accounts, and the ability to access the funds in the event of an emergency. In 2023, the total annual contribution limit for 457 plans is $19,500 for individuals under age 50 and $26,000 for individuals age 50 and older. Participants age 50 and older can also make catch-up contributions of up to $6,500. Contributions to a 457 plan are made with pre-tax dollars, and funds withdrawn after age 59½ are only subject to income taxes.