Generally speaking, 457 retirement plans are non-qualified, tax-advantaged, deferred compensation retirement plans offered by state governments, local governments, and some nonprofit employers. Eligible participants can make salary deferral contributions, depositing pre-tax money allowed to compound without being taxed until it is withdrawn.
A 457 retirement plan is an employer-sponsored, tax-favoured retirement savings account. With this type of plan, you contribute pre-tax dollars from your paycheck, and that money won’t be taxed until you withdraw the money, usually for retirement. Some 457 plans offer a Roth option whereby contributions would be made with after-tax dollars, and your money could be withdrawn tax-free in retirement if the conditions for a qualified distribution are met.
Learn more about how these plans work, including specifics regarding contribution limits and employer matching.
Notably, 457 retirement plans are similar to other plans. Rather than being offered to employees at for-profit companies, they cater to state and local public workers, together with highly paid executives at specific nonprofit organizations, such as charities.
Participants of these defined contribution plans set aside a percentage of their salary for retirement. These funds are transferred to the retirement account, where they grow in value without being taxed.
You may be given the option of investing the contributions in mutual funds that you choose from an array of funds, while the interest and earnings aren’t taxed until you withdraw the funds in retirement. Typically 457 retirement plans only offer two types of investments—annuities or mutual funds—both tax-deferred.
There are two types of 457 plans:
- 457(b): This is the most common 457 retirement plan offered to state and local government employees.
- 457(f): A plan offered to highly compensated government and select non-government employees.
The most common type of 457 retirement plan is the 457(b), and it’s excellent as a retirement savings vehicle. It has high contribution limits, and account holders can use it with other tax-advantaged accounts to supercharge their retirement savings.
Employees can contribute up to 100% of their salary, provided it does not exceed the applicable dollar limit for the year. If the plan does not meet statutory requirements, the assets may be subject to different rules.
Some employers may match the amount you contribute to a 457 retirement plan up to a specific limit. If you’re lucky enough to work for such an employer, take advantage of it by contributing to the plan at least as much as the match.
If your employer does not currently offer a 457 plan, it might pay to lobby for one. As far as retirement plans are concerned, you’d be lucky to have the chance to save in a 457 plan.
A 457 retirement plan is designed to supplement your retirement income. While a pension and Social Security may go a long way, they are unlikely to be enough. Saving to your 457 plan can help you maintain your desired standard of living. So, get yourself a 457 retirement plan today. You can enrol online in your 457 plan. Depending on your plan rules, you may also be able to change your contribution amounts online. The following paper form is also available.