A 457 retirement plan is a non-qualified (i.e. does not need to meet the restrictions set up by IRS under section 401) deferred compensation plan for government employees and tax-exempt organizations. The plan designed to comply with the rules of Internal Revenue Code section 457 is referred to as a Section 457 retirement plan. Employees are allowed to defer compensation on a pre-tax basis through payroll deductions that further allows them to defer federal and sometimes state taxes until the assets are withdrawn. In effect, a 457 retirement is quite similar to a 401k plan used by for-profit employers.
Participants in the Section 457 retirement plan can defer income up to 100% of the employee's compensation limited to an annual amount set by IRS--$15,500 for 2008 plus a $5,000 catch-up contribution for people age 50+.
The types of entities that can establish a 457 retirement plan are states, subdivisions of states, instrumentalities or political subdivisions of states, or any entity other than a governmental unit that is exempt from federal income taxes. Governmental units that are exempt from federal income taxes include the following types of organizations:
charitable organizations
religious organizations
educational organizations
private hospitals
private foundations
labor unions
trade associations
fraternal orders
farmers cooperatives
Note that these tax exempt entities may also have a 401k plan for their employees and the employees may contribute to both plans up to the $15,500 maximum for each. There are no contributions by the employer with 457 retirement plans as there are with 401k plans. Additionally, your account in a 457 retirement plan can be rolled over just like a 401k, into an IRA or other qualifying tax sheltered plans. Unlike a 401k, if you retire or leave an employer before age 59 1/2, there is no 10% penalty for accessing your 457 retirement plan balance. Typically, employers that provide a 457 retirement plan will also provide assistant from retirement consultants to help understand the intricacies.
Below is a chart showing the differences and similarities between a 457 retirement plan and 401k plan. If you are eligible to participate in a 457 retirement plan, the decision to contribute would be part of the considerations of your whole retirement income plan.
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Very helpful information on 457 plans and retirement. Thank you.
Another helpful site for tips and news on retirement plans and IRA's is retirementthink.com
Retirement benefits for highly paid executives participating in plans offered to all employees of a nonprofit organization, such as a traditional pension plan tend to have various limits on the amounts that executives or their associations can contribute. Additional benefits for association executives take a number of forms.
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Very interesting information and post. Yout got into good details. I know about this subject to some extent but I had no idea that participants in the Section 457 retirement plan can defer income up to 100% of the employee’s compensation. I know it's limited but that is something I never knew and many people may not.
Nice post and keep them coming!
finally now im understand what a 457 Retirement Plan is through this article. thanks to share 🙂
Nice write up. I thin kthe most valid consideration is in whether or not the recipient understands all of this on their own. Most people like to seek the help of a seasoned financial professional to assist in planning like this.
This 457 retirement plan provides benefit to government employees as well as employees of tax exempt organizations.
I read you post. This is informative and helpful.. I like 457 retirement plan...
The Plan can also be an ideal investment plan in states where no Social Security contributions are applicable. However, for being entitled to the various benefits of the 457 plan, you need to comply with some of the terms and conditions set by Internal Revenue Code.
The 457 retirement plan is a type of tax deferred and advantaged retirement compensation plan. It mostly covers state and federal government employees. Employees of the state and government agencies are also included under the plan. The benefits provides by the 457 plan make it a very popular retirement savings options for employees, retirees and aged Americans.
Thanks for this post. This post is very helpful for retirement planning. As the retirement is very risky situation in life, so it is very necessary to know all information about retirement. Peaceful future depend upon the proper retirement planning.
457 plan is rdm required if continuing to work after 70 1/2 years old?
yes, you must start distributions. The rules are different for say a 401k and 457. Here is the excerpt from the IRS code. See the very last line (iv) that for governmental plans, the 701/2 exception does not apply
(C) Required beginning date.— For purposes of this paragraph—
(i) In general.— The term “required beginning date” means April 1 of the calendar year following the later of—
(I) the calendar year in which the employee attains age 701/2, or
(II) the calendar year in which the employee retires.
(ii) Exception.— Subclause (II) of clause (i) shall not apply—
(I) except as provided in section 409 (d), in the case of an employee who is a 5-percent owner (as defined in section 416) with respect to the plan year ending in the calendar year in which the employee attains age 701/2,m or
(II) for purposes of section 408 (a)(6) or (b)(3).
(iii) Actuarial adjustment.— In the case of an employee to whom clause (i)(II) applies who retires in a calendar year after the calendar year in which the employee attains age 701/2, the employee’s accrued benefit shall be actuarially increased to take into account the period after age 701/2 in which the employee was not receiving any benefits under the plan.
(iv) Exception for governmental and church plans.— Clauses (ii) and (iii) shall not apply in the case of a governmental plan or church plan. For purposes of this clause, the term “church plan” means a plan maintained by a church for church employees, and the term “church” means any church (as defined in section 3121 (w)(3)(A)) or qualified church-controlled organization (as defined in section 3121 (w)(3)(B)).