The Advantages Of A 457(B) Savings Plan (2024)

FAQs

The Advantages Of A 457(B) Savings Plan? ›

What are the advantages of participating in a 457(b) plan? There are significant tax advantages for participants in a 457(b) plan: Contributions to a 457(b) plan are tax-deferred. Earnings on the retirement money are tax-deferred.

For employees, the key benefit of a 457(b) plan is that the savings are tax-deferred: Contributions are made on a pre-tax basis, reducing taxable income and growing tax-deferred until withdrawal.

For all intents and purposes, a 457(b) is just as good as a 401(k) plan. On the downside, with a 457(b), your contributions will probably not be matched by your employer. But that's just a reality of working in the nonprofit or public sector, not a rule of the plan.

Generally, withdrawals must be repaid within three years in order to avoid the money being taxed as income. Finally, if your plan allows it, you can access some of your money via a loan.

You can take penalty-free withdrawals from your 457 account at any age after you leave your job. Most other types of retirement-savings plans assess a 10% penalty if you withdraw money before age 55 or 59½, depending on when you leave your job.

Similar to other tax-deferred retirement accounts, like 401(k)s and traditional IRAs, you're generally required to start taking withdrawals from your 457(b) plan once you reach age 73, unless you're still working for the employer sponsoring the plan and you're not a 5% owner.

Special 457(b) catch-up contributions, if permitted by the plan, allow a participant for 3 years prior to the normal retirement age (as specified in the plan) to contribute the lesser of: the elective deferral limit ($23,000 in 2024; $22,500 in 2023; $20,500 in 2022; $19,500 in 2020 and in 2021).

Your employer's 457(b) deferred compensation plan has no effect on the benefits you will receive from Social Security. Your Social Security contributions and benefits (if applicable) will be based on your total pay, including the amounts paid into the deferred compensation plan.

Unlike the 457(b), the 403(b) plan is subject to a 10% early withdrawal penalty if you take distributions before you reach age 59 1/2. But like the 457(b)—and 401(k) plans—contributions to a 403(b) plan are typically made with pretax dollars.

Contributions to a 457(b) plan are tax-deferred. Earnings on the retirement money are tax-deferred.

Do you pay capital gains on 457 B? ›

Like other employer-sponsored retirement plans, the 457(b) provides tax-efficient growth for retirement savings: You don't pay capital gains taxes on the investments you buy and sell in your account, giving your retirement nest egg additional room for growth.

One-Time Withdrawals

This payment is immediately taxable (see the note below) and is subject to mandatory 20% federal income tax withholding. State income tax withholding may also apply.

In a non-governmental 457(b) plan: Funds can only be transferred to or withdrawn from other non-governmental plans (i.e. if you leave your job, you could have to take a lump sum which could turn into a major tax headache). Funds cannot be rolled over into other retirement savings accounts such as an IRA or 401(k).

Withdrawals from 457 retirement plans are taxed as ordinary income; however, distributions from a Roth 457 plan are not subject to tax withholding. 110 Also, governmental 457(b) plan participants are permitted to roll over their funds into other qualified plans.

While you are employed, your employer may permit you to take a withdrawal from your 457(b) plan due to an unforeseeable emergency. All unforeseeable emergency withdrawal requests will be reviewed in accordance with the plan's procedures for a determination as to whether the withdrawal is permitted.

The movement of funds from a 457(b) plan to an IRA, typically tax-free if completed within 60 days, is actually shifting money from one tax-advantaged account to another. However, any distributions taken before age 59.5 from the IRA may incur a 10% early withdrawal penalty.

The two plans are also different in that 401(k) plans do not offer a three-year Pre-Retirement Catch-Up; and 457(b) plans do. Another difference is that a 401(k) distribution prior to age 59½ may be subject to a 10% early withdrawal penalty and 457(b) plans generally do not have the same early withdrawal penalty.

To enroll in the 457(b) deferred compensation plan, you must be an eligible faculty or administrative staff employee with eligible earnings of more than $257,000 in 2023 for 2024 participation.

Your 457(b) Savings Plan contributions will be automatically deducted from your gross pay before any federal — and in most cases, state and local — income taxes are deducted. This reduces your taxable income, which means you pay less income tax each year.