457(b) Plan

What is 457(b) Plan?

A 457(b) plan is a type of retirement savings plan available to employees of state and local governments and certain nonprofit organizations, such as public schools and hospitals. It is designed to help these employees save for retirement and offers tax advantages similar to employer-sponsored retirement plans.

457(b) Plans Defined

A 457(b) plan is an employer-sponsored, tax-advantaged retirement account offered to state and local government employees, including police officers, firefighters, and other civil servants. It’s a 401(k) for the government workers. Additionally, some executives at certain nonprofits, such as hospitals, charities, and unions, also get access to 457(b) plans.

How a 457(b) Plan Works

  1. Employee Contributions: Participants contribute to their 457(b) plan through salary deferrals, which are deducted from their paychecks on a pre-tax basis. This reduces their taxable income for the year, allowing them to save for retirement more efficiently.
  2. Employer Contributions: Unlike other retirement plans, such as 401(k) plans, employer contributions to a 457(b) plan are optional and vary by employer. Some employers may make matching or non-elective contributions to their employees’ 457(b) plans, providing additional retirement savings.
  3. Investment Options: Participants can typically choose from various investment options within their 457(b) plan, including mutual funds, annuities, and sometimes employer stock. This allows participants to tailor their investment strategy to their risk tolerance, investment goals, and time horizon.
  4. Tax-Deferred Growth: Contributions and earnings within a 457(b) plan grow tax-deferred until withdrawal in retirement. This means participants do not pay taxes on investment gains until they begin taking distributions from the plan in retirement.
  5. Withdrawal Rules: Withdrawals from a 457(b) plan can typically be made penalty-free after separation from service, such as retirement or termination of employment. However, income taxes still apply to withdrawals, which are taxed at the participant’s ordinary income tax rate.

Consult with the irs.gov website for more information.

457(b) Plans Are Used For

  • Retirement Savings: The primary purpose of a 457(b) plan is to provide a tax-advantaged way for employees of state and local governments and certain nonprofit organizations to save for retirement. By contributing to a 457(b) plan, participants can build a nest egg to support themselves in retirement.
  • Tax Benefits: 457(b) plans offer tax advantages similar to other employer-sponsored retirement plans, such as tax-deferred growth on contributions and potential tax deductions for employer contributions. These tax advantages help participants maximize their retirement savings and minimize their tax liability.
  • Employee Benefits: Employers offer 457(b) plans as part of their employee benefits package to attract and retain talented employees. By providing a retirement savings plan, employers demonstrate their commitment to their employees’ financial well-being.

For someone new to the subject, understanding a 457(b) plan involves grasping its purpose, eligibility criteria, contribution options, investment choices, and tax advantages. It’s essential to consult with a financial advisor or human resources representative to fully understand how a 457(b) plan works and how to make the most of it for retirement planning.