457 PlanPersonal Finance
The 457 retirement program is a tax-advantaged account highly similar to 401k and IRA programs. These plans are oriented towards state, municipal, non-profit and government agency employees. The program is fairly simple. You set pretax dollars aside for your retirement, you receive reduced taxable income, and your deposit into your retirement fund grows tax-deferred until withdrawal. Your contributions are set aside in a trust held until you’re ready to make withdrawals at retirement. Withdrawals of your distribution are required after 70½.
457 Plan Types
The two major plan categories are Private plans and Public plans, depending on who is served. These categories also have an impact on how the plan functions. In a public plan local and state governments establish plans for their own employees. This plan services all employees within the organization: states, agencies, and political divisions typically have access to these plans. The private plan is typically used by charities, hospitals, unions, and other non-state organizations. Private plans are normally limited due to existing regulations: they will typically be accessible only to management or high-level employees.
Note that both plans are completely optional. An employer does not have to create 457 programs or make them accessible to their employees. While any individual can use a public 457 plan when it exists, the rules for accessing the program is set by the employer itself.
The federal limit for your contributions to 457 programs is the same as a 401k annual contribution. In 2013 this limit was $17,500 with a $5,500 catch-up contribution for those over 50 years of age. The 10% tax penalty does not occur for those below 59½. There is also another catch-up contribution accessible during the last few years before retirement. This allows you to invest double the normal contribution amount for three years before your retirement. You cannot use an age-based contribution limit while using a double contribution.
You can contribute to a 457 plan and alternatives if your employer allows. You can contribute the maximum to a 403b and 401k alongside your 457. The catch is simple: the organization must offer multiple plans. This is extremely rare due to the cost and conditions that regulate the organizations which offer 457 plans.
Your 457 can also be rolled over into a substantial amount of substitute program. You can transfer money in this program into a new employer’s 457. You can also transfer them to 403b or a 401k. These are all employer driven programs. If you desire, you can transfer them to a government driven IRA vehicle. However, you should carefully consider your transfers. If you want or need to withdraw money from the other plans you will pay regular income taxes on the withdrawal plus a 10% tax penalty. If you withdraw from a 457, you will pay income taxes, but not a 10% tax penalty. You won’t be able to deposit new money into your old 457, and may lose some control. Check your program’s rules for your rights if concerned.
457s & Loans
You can also borrow money from your 457 plan. This is not recommended but is possible. If you borrow against the balance of your retirement, you will be repaying the principal and interest with after-tax dollars. Your 457 plan was built with pretax dollars. If you lose your job, you may be forced to pay the loan back in full. If the loan is recalled, it could possibly register as a distribution. A 457 plan does not require a 10% penalty below 59½.
You might die before your 457 fund is empty. In this case, your 457 will be inherited by your beneficiary. Note that your beneficiary is not designated by your will. You must entitle your beneficiary in the 457’s forms. If you want to change who inherits your 457 funds, you must update the beneficiary. No other document will impact who receives your funds in the case of your death.
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