457 Plan: A Retirement Savings Option for Government and Nonprofit Employees

A 457 Plan is a type of tax-advantaged, non-qualified retirement savings plan offered to employees of state and local governments, as well as certain nonprofit organizations. Similar to 401(k) and 403(b) plans, the 457 Plan allows participants to contribute a portion of their salary to the plan on a pre-tax or Roth basis, with the savings growing tax-deferred until withdrawn in retirement.

The 457 Plan is crucial for government and nonprofit employees as it provides a flexible and beneficial way to save for retirement. Unlike other retirement plans, the 457 Plan does not impose an early withdrawal penalty for distributions taken before age 59½, making it an attractive option for those who may need access to their funds earlier.

• Contribution Limits: For 2023, participants can contribute up to $22,500 per year, with an additional “catch-up” contribution of $7,500 for those aged 50 or older.

• Tax Advantages: Contributions to a traditional 457 Plan are made on a pre-tax basis, reducing taxable income, while Roth 457 contributions are made with after-tax dollars, allowing for tax-free withdrawals in retirement.

• No Early Withdrawal Penalty: Unlike 401(k) and 403(b) plans, 457 Plans do not have a 10% penalty for early withdrawals before age 59½, providing more flexibility for participants.

• Governmental 457(b) Plan: This plan is available to employees of state and local governments and is subject to specific IRS rules that govern contribution limits and distributions.

• Non-Governmental 457(b) Plan: Offered by certain nonprofit organizations, these plans have similar contribution limits but are subject to different rules, particularly regarding rollovers and early withdrawals.

• 457(f) Plan: Also known as a “Top Hat” plan, this is a non-qualified deferred compensation plan for highly compensated employees of tax-exempt organizations. Unlike 457(b) plans, 457(f) plans often have more restrictive vesting schedules.

• Roth 457 Contributions: Increasingly, employers are offering Roth 457 options, allowing employees to make after-tax contributions and enjoy tax-free withdrawals in retirement.

• Automatic Enrollment: Some organizations are implementing automatic enrollment features in their 457 Plans to encourage higher participation rates among employees.

• Managed Accounts and Target-Date Funds: Many 457 Plans now offer managed accounts and target-date funds, providing participants with professionally managed investment options tailored to their retirement timeline.

• Maximize Contributions: To fully benefit from the tax advantages and potential employer matching contributions, participants should aim to contribute the maximum allowable amount each year.

• Consider Roth Contributions: If you expect to be in a higher tax bracket in retirement, Roth 457 contributions may provide significant tax savings.

• Coordinate with Other Retirement Accounts: For those eligible to contribute to both a 457 Plan and a 403(b) or 401(k), consider maximizing contributions to all available accounts to boost retirement savings.

The 457 Plan is a versatile and valuable retirement savings option for employees of government and nonprofit organizations. With its flexible withdrawal rules, significant tax advantages and the potential for Roth contributions, the 457 Plan can play a key role in a well-rounded retirement strategy.