A 457(b) plan is a type of retirement savings plan available to certain employees of state and local governments. Also, they are available to the staff of some non-governmental organizations. The plan allows employees to defer a portion of their compensation into the plan on a pre-tax basis. Reducing their current taxable income and allowing the funds to grow tax-deferred until withdrawn in retirement.
The purpose of a 457(b) plan is to provide retirement savings for employees of certain government and non-governmental organizations. These plans are designed to help employees save for retirement in a tax-efficient manner. Also, they provide some flexibility in terms of contributions and withdrawals. Unlike other retirement plans, such as 401(k) plans or traditional IRAs, 457(b) plans are specifically tailored to the needs and circumstances of government and non-governmental employees.
Eligibility and Participation in 457(b) Plan:
To be eligible to participate in this plan, an individual must be an employee of a state or local government agency, or a tax-exempt non-governmental organization that sponsors a 457(b) plan. In some cases, employees of public school districts and universities may also be eligible.
Enrollment in a 457(b) plan is typically automatic for eligible employees. Although they may need to complete some paperwork or take certain steps to begin making contributions. Employers may also have specific enrollment periods during which employees can opt into the plan. And employees may be required to meet certain eligibility requirements. Such as completing a certain period of service with the employer.
Once an employee is enrolled in this plan they can begin making contributions from their salary on a pre-tax basis, up to certain limits. Some employers may also offer a matching contribution or other employer contributions to the plan. Which can help boost retirement savings.
Contributions and its types in 457(b) Plan:
This plan allows for two types of contributions:
Pre-Tax Contributions: These are contributions made to the plan on a pre-tax basis. Which reduces an employee’s taxable income for the year. Pre-tax contributions grow tax-deferred until withdrawn in retirement. At which time they are taxed as ordinary income.
Roth Contributions: Some 457(b) plans also allow for after-tax Roth contributions. These contributions do not reduce an employee’s taxable income for the year. But they do grow tax-free and can be withdrawn tax-free in retirement.
The IRS sets limits on how much an employee can contribute to a 457(b) plan each year. For 2023, the contribution limit is $19,500. Employees who are age 50 or older can also make catch-up contributions of up to an additional $6,500 per year.
It’s important to note that the contribution limits for a 457(b) plan are separate from those for other retirement plans. For example, a 401(k) plan or a traditional IRA. So an employee can contribute the maximum amount to both a 457(b) plan and a 401(k) plan in the same year. For a total of $39,000 in 2023 (plus catch-up contributions, if eligible). However, there are additional rules around contributing to both a 457(b) plan and another type of plan. So employees should consult with a financial advisor or tax professional before doing so.
Investment options available in a 457(b) plan:
The investment options available in a 457(b) plan depend on the plan sponsor and the specific investment providers they work with. Generally, 457(b) plans offer a variety of investment options. Including mutual funds, index funds, target-date funds, and other options. Some plans may also offer access to individual stocks, bonds, or other investment vehicles.
The risks and rewards associated with different investment options in a 457(b) plan can vary widely. Mutual funds and other investment options that track broad market indices can offer a diversified portfolio and potentially reduce risk. But they may also have lower potential returns. Individual stocks and other investments can offer higher potential returns. But may also be riskier and more volatile.
It’s important for employees to carefully consider their investment options and goals when selecting investments in a 457(b) plan. They should also be aware of the fees associated with different investment options. High fees can significantly reduce investment returns over time. Many plans offer access to financial advisors or investment education resources to help employees make informed investment decisions.
When distributions Can You Take From a 457(b) Plan?
Distributions from a 457(b) plan can generally be taken after an employee has separated from service with their employer. Such as through retirement or termination. However, some plans may also allow for in-service withdrawals under certain circumstances. Such as financial hardship or unforeseeable emergencies.
When distributions are taken from a 457(b) plan, they are subject to taxation as ordinary income. This means that employees will owe taxes on the full amount of the distribution. Including any pre-tax contributions, employer contributions, and investment earnings.
If an employee takes a distribution from a 457(b) plan before age 59 ½. They may also be subject to a 10% early withdrawal penalty, in addition to regular income taxes. However, there are some exceptions to this penalty. Such as for distributions taken due to a disability or as part of a series of substantially equal payments.
It’s important for employees to carefully consider the tax implications and potential penalties associated with taking distributions from a 457(b) plan, and to consult with a financial advisor or tax professional before making any decisions about their retirement savings.
Advantages of a 457(b) Plan:
There are several advantages to participating in a 457(b) plan:
Tax Benefits: Contributions to a 457(b) plan are made on a pre-tax basis. Reducing an employee’s taxable income for the year. This can help employees save money on taxes in the present. And can also reduce their tax burden in retirement if they are in a lower tax bracket.
High Contribution Limits: The IRS sets high contribution limits for 457(b) plans. Allowing employees to save more for retirement than they might be able to through other retirement savings options. The contribution limit for 2023 is $19,500, and employees who are age 50 or older can make catch-up contributions of up to an additional $6,500 per year.
Flexibility: 457(b) plans offer a great deal of flexibility in terms of when and how employees can access their savings. Unlike some other retirement savings options, there are no age restrictions on when distributions can be taken from a 457(b) plan. Which can allow employees to retire earlier or adjust their retirement plans as needed.
A 457(b) plan can be a powerful tool for employees to save for retirement and take advantage of tax benefits and high contribution limits. However, employees should carefully consider their investment options and distribution plans to ensure that they are making the most of this valuable retirement savings option.
Disadvantages of a 457(b) Plan:
While there are many advantages to participating in a 457(b) plan, there are also some potential disadvantages to consider:
Limited Employer Match: Unlike 401(k) plans, many 457(b) plans do not offer employer-matching contributions. This means that employees may not be able to take advantage of free money from their employer to boost their retirement savings.
Early Withdrawal Penalties: If employees need to take distributions from a 457(b) plan before age 59 ½. They may be subject to a 10% early withdrawal penalty in addition to regular income taxes. This penalty can significantly reduce the value of an employee’s retirement savings if they need to access their funds before retirement.
Limited Investment Options: Most 457(b) plans offer a range of investment options. They may not offer as many choices as some other retirement savings options. This can limit employees’ ability to tailor their investments to their specific goals and risk tolerance.
A huge issue with 457 plans is they don’t allow you to invest in precious metals.
Can You Invest in Gold with a 457 Plan? (How to Buy Gold with 457(b))
No. A 457 plan doesn’t allow you to invest in precious metals.
To do that, you will need to open a self-directed IRA with a precious metals IRA provider.
With a precious metals IRA, you can invest in multiple IRS-approved products of gold, silver, platinum and palladium. Recently, such IRA accounts have become increasingly popular because they allow investors to safeguard inflation and recession.
I recommend checking out our top gold IRA providers. That way, you can find out what the industry’s best has to offer.
A 457(b) plan can be a valuable tool for employees to save for retirement and achieve their long-term financial goals. By contributing regularly and carefully considering their investment options and distribution plans, employees can take advantage of the many benefits that a 457(b) plan has to offer.
Overall, a 457(b) plan can be an important part of a comprehensive retirement savings strategy. Employees should carefully consider their options and consult with a financial advisor or tax professional to ensure that they are making the most of this valuable benefit.
However, they don’t allow you to invest in gold and other precious metals.