How Can a 457(b) Plan Benefit Me?

When you work for state or local government—or an eligible tax-exempt organization—you are usually eligible for a 457(b) retirement plan. This is a tax-advantaged plan that allows you to grow your savings over time, similar to a 401(k) plan. However, there are some drawbacks that come with 457(b) plans. Here’s what you need to know about 457(b) retirement plans and how they can benefit you.

What is a 457(b) plan?

457(b) plans are similar to 401(k) plans in that they both allow you to put your retirement savings into a tax-advantaged account. You’ll be able to grow your savings tax-free. Like 401(k)s, 457(b) plans let you defer a certain dollar amount each year, which is linked to the cost-of-living indexes. (In 2021, the limit is $19,500.) If you’re 50 or older, you can contribute an additional $6,500 per year. Like 401(k)s, they may also allow a pre-tax and after-tax Roth version.

How are 457(b) plans different from other pension plans?

One major difference is that 457(b) plans allow you to save extra money, starting three years before your retirement age. The retirement age may vary, depending on your workplace. The three-year rule allows employees to contribute either twice the normal elective deferral limit, or the current year’s ceiling added to the prior years’ unused amounts, whichever amount is lower.

This means your 2021 contribution—if you’re taking advantage of the three-year rule’s “catch up” opportunity—could be as much as $39,000. However, in order to take advantage of the ceiling plus prior years, you’ll need to have all your previous payroll records showing how much you’re allowed to contribute. That can be a major administrative headache, which is why some employers don’t like to offer that option.

Another difference is that state and local government employers do not usually provide matching contributions to employees. If they do, their contributions count toward the allowable amount—so if your employer contributes $3,000, you’ll only be able to contribute $16,500 of your own money.

The reason government employers rarely match is because usually there are other pensions available. 457(b) plans are considered supplemental plans—and the fees are higher.

It’s also harder to withdraw money from a 457(b) plan than it is from a 401(k). You can only withdraw if there’s an emergency situation in which no other resources are available. The problem has to be catastrophic, like losing your home to a natural disaster.

However, if you plan to take your distributions before age 59 and ½, you won’t be subject to a 10 percent penalty like you would with a 401(k). That’s good news for anyone who thinks they might want to retire early.

All in all, there are both benefits and drawbacks to using a 457(b) plan. If you’re interested in learning more about how each type of plan will affect you, it’s smart to talk to a financial advisor.

For information about pension plans, reach out to Fiduciary Advisors, Ltd. today. We look forward to meeting with you.