What Is a 457(b) Plan

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Do you want to get an early start on retirement planning and secure a stronger financial future? If so, then understanding what a 457(b) plan is could be your first step. These plans are widely known as “deferred compensation” plans, meaning that contributions made during employment are not subjected to income tax until the funds are distributed.

In this blog post, we'll answer some frequently asked questions about 457(b)s and look at how you can take advantage of one to further your financial goals. Read on to learn more!

What is a 457(b) plan, and what are the benefits of contributing to one

 

A 457(b) plan is a retirement savings account offered by many states, municipalities, and some non-profit employers. It allows employees to set aside pre-tax funds into an investment account to defer taxes on those investments until they are withdrawn in retirement.

By contributing to a 457(b), you can save more on taxes now, invest that money in the stock market and other investments with the potential to grow over time, and make sure you have enough money saved up for retirement.

In addition to reducing your tax burden, contribution limits for 457(b) plans are higher than those of many traditional retirement accounts like 401(K)s. The 2020 contribution limit is $19,500 for individuals under age 50 and up to an additional $6,500 “catch-up” contribution for those over 50. Moreover, 457(b) plans are not subject to income tax until they are withdrawn in retirement. This can help maximize your savings, as you don’t have to pay taxes on the money until you use it.

What investments can be held in a 457(b) plan

A 457(b) plan is an investment account so investments can vary depending on your employer and chosen provider. Generally, however, the plan offers a range of mutual funds, ETFs, and other types of investments. Depending on your chosen plan, you can also invest in stocks, bonds, annuities, and other investment vehicles.

What is the difference between a 457(b) and 401(K)

The main differences between a 457(b) and a 401(k) are the contribution limits, employer match requirements, distributions, and taxation. As discussed earlier, 457(b) plans have higher contribution limits than 401(k)s ($19,500 for individuals under age 50). The employer is not required to match any contributions to a 457(b), but some employers may do so. Distributions from a 457(b) are subject to income tax and the 10% early withdrawal penalty, while distributions from a 401(k) can be taken out without incurring a penalty before age 59 ½ as long as they are part of an employer’s retirement plan. Finally, contributions to a 457(b) are made with pre-tax dollars, while contributions to a 401(k) are made with after-tax dollars.

Overall, 457(b) plans offer higher contribution limits and more flexible distributions than 401(K)s, giving participants the potential to save even more for their retirement. If you're looking to get an early start on retirement planning, a 457(b) plan could be the right option for you.

Who can contribute to a 457(b) plan, and how much can they contribute each year

 

Any state, municipality, or non-profit organization employee can contribute to a 457(b) plan. The maximum annual contribution allowed is $19,500 for individuals under age 50 and up to an additional $6,500 “catch-up” contribution for those over 50. It is important to note that even if you don’t contribute the full amount, any amount contributed is subject to income tax when it is withdrawn from the plan in retirement.

What are the drawbacks of a 457(b) plan

One potential drawback of a 457(b) plan is that employer contributions are optional, and no matching funds are provided. This means that your contributions to your plan are solely your responsibility, and there is no help from your employer. Moreover, withdrawals are subject to income tax and the 10% early withdrawal penalty. Finally, 457(b) plans may have fewer investment options than other retirement plans like 401(K)s.

Despite these potential drawbacks, a 457(b) plan can still be a great choice for those looking to save more for retirement. The higher contribution limits and tax-deferred growth make it an attractive option for anyone who can contribute the maximum amount yearly.

How do I choose a 457(b) plan provider, and what should I look for when comparing plan

When choosing a 457(b) plan provider, it is important to consider the fees associated with the plan and the types of investments offered. It would help if you also looked for providers that offer low-cost funds and provide access to financial advisors or planning tools.

Finally, it would help you understand the distribution and withdrawal restrictions before investing in the plan. By taking the time to research and compare plans, you can ensure that your 457(b) plan is a smart choice for your retirement savings goals.

What are the tax implications of contributing to a 457(b) plan vs. other retirement savings vehicles such as 401(k)s or IRAs?

Contributions to a 457(b) plan are made with pre-tax dollars and grow tax-deferred. This means you don’t have to pay taxes on the money until you withdraw it, usually in retirement. This can benefit people looking to lower their current taxable income and reduce the taxes they will owe in the future.

The tax implications of contributing to a 401(k) or IRA are different since contributions to these plans are made with after-tax dollars. You will pay taxes on any distributions taken out of these plans. Additionally, taking money out before age 59 ½ may incur a 10% penalty.

Overall, the tax implications of contributing to a 457(b) plan can be very beneficial for those wishing to minimize their current and future tax burdens. However, it is important to consider all factors when deciding which retirement savings vehicle is right for you.

Are there any restrictions on using my 457(b) funds once I retire?

The rules and restrictions of 457(b) plans vary by employer. Generally, participants are allowed to begin taking distributions once they reach the age of 59 ½, as long as they have been employed with their organization for at least five years before that. Some employers may also restrict how and when you can withdraw your funds.

Furthermore, it is important to remember that distributions from a 457(b) plan are subject to income tax and the 10% early withdrawal penalty if taken before age 59 ½. It is also important to remember that you may be required to take Required Minimum Distributions (RMDs) once you reach 70 ½, regardless of whether or not your employer still employs you.

Overall, understanding the rules and restrictions of your particular 457(b) plan will help you make the most of it in retirement. It is always a good idea to consult a financial advisor to ensure you make the best decisions for your unique situation.

How does the recent change in the tax law affect contributions to 457(b) plans

The Tax Cuts and Jobs Act of 2017 changed the cap on 457(b) plan contributions from $18,000 per year to $19,500 for 2019. This increase in the maximum contribution amount is set to continue until 2025, when it will be indexed for inflation.

These changes mean that those who are already maxing out their contribution limits will now be able to save an additional $1,500 per year. Moreover, it may also incentivize those who are not contributing or only contributing a lower amount to max out their contributions and benefit from the higher contribution limit and tax-deferred growth.

Overall, this change in the tax law is great news for those looking to save more for retirement. It is important, however, to make sure that you understand the rules and restrictions of your particular plan before making any changes. Additionally, it may be beneficial to speak with a financial advisor or tax professional who can help you make the most of this change in the tax law.

FAQs

What is a 457 B plan, and how does it work?

A 457(b) plan is a type of employer-sponsored retirement savings plan. Contributions are made with pre-tax dollars, and the funds grow tax-deferred until withdrawal, usually in retirement. Distributions from a 457(b) plan are subject to income tax but not the 10% penalty if taken before age 59 ½. The maximum contribution limit in 2019 is $19,500, which will be indexed for inflation until 2025.

What is the difference between a 401k and a 457b?

The primary difference between a 401(k) and 457(b) plan is that contributions to a 401(k) plan are made with after-tax dollars, while contributions to a 457(b) plan are made with pre-tax dollars. Furthermore, distributions from a 401(k) plan are subject to income tax and the 10% early withdrawal penalty before age 59 ½, while distributions from a 457(b) plan are only subject to income tax. Additionally, a 401(k) 's maximum contribution limit is $19,000 per year, while the maximum contribution limit of 457(b) is $19,500 per year.

What restrictions should I be aware of when investing in a 457(b) plan?

The rules and restrictions of 457(b) plans vary by employer, so it is important to understand the specifics of your particular plan before investing. Generally, participants are allowed to begin taking distributions once they reach the age of 59 ½, as long as they have been employed. Additionally, you may be subject to a 10% early withdrawal penalty if you take distributions before reaching the age of 59 ½. Some employers also restrict when and how you can withdraw your funds.

Is a 457 B plan a good idea?

A 457(b) plan can be a great way to save for retirement, as it offers tax-deferred growth and the ability to make pre-tax contributions. However, it is important to understand the rules and restrictions of your particular plan before making any decisions. Additionally, speaking with a financial advisor or tax professional who can help you make the most of this type of retirement plan may be beneficial.

Conclusion

This article has helped provide an overview of a 457(b) plan and how it works. It is important to remember that the rules and restrictions vary by employer, so make sure to understand the specifics of your particular plan before investing. Additionally, speaking with a financial advisor or tax professional who can help you make the most of this type of retirement plan may be beneficial. Ultimately, your best bet is to explore all your options and determine which retirement plan will benefit you the most.

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