These plans have contribution limits similar to 401(k) and 403(b) plans. However, there are some important differences that make 457(b) plans an appealing alternative for those eligible to make contributions.
2021 and 2022 Contribution Limits for 457(b) Plans
Similar to the contribution limits for 401(k)s, employees can generally contribute up to $19,500 to a 457(b) plan in 2021. This limit increases to $20,5000 for 2022. Those who receive an employer matching contribution will have higher total plan contributions. The total contributions to a 457(b) plan cannot amount to more than 100% of an employee’s compensation. In 2021 and 2022, workers who are 50 or older may be able to set aside an additional $6,500 per year as a “catch-up contribution.” Workers who are nearing retirement may make even larger catch-up contributions. For the three years before they reach the retirement age specified in their plan, employees can contribute the lesser of: Participants may not take advantage of both the 50-or-older and three-years-before-retirement catch-up contributions in the same year.
The Benefits of Participating in a 457(b) Plan
There are some significant tax advantages for participants in a 457(b) plan. Just like with 401(k) and 403(b) plans, all contributions to a 457(b) plan grow tax-deferred. This means that those with plans will not pay any income taxes on the contributions they make or investment earnings until they withdraw the funds. Withdrawals are taxed as ordinary income once they’re made. One thing that sets 457(b) plans apart from other retirement plans like the 401(k) and 403(b) is there is no 10% early withdrawal penalty for taking money out of the account prior to age 59½. This rule applies only if you are no longer working for the same employer. This unique distinction often makes a 457(b) plan even more attractive than its peers, especially for those planning on retiring early or accessing their retirement funds prior to age 59½. For additional information on 457 (b) plans, visit the IRS website or review Publication 4484.
Retirement Saving Tips for 457(b) Plans
If you work for the government and then change jobs or are terminated, you may transfer the money from your 457(b) account into your new employer’s 401(k), 403(b), or 457(b) plan (provided that it accepts transfers). You also may have the option to roll the money over to a traditional IRA. Employees of tax-exempt organizations can only transfer funds to another tax-exempt 457(b) plan that accepts transfers, leave the money in the plan, or take a taxable distribution if they leave their employer. Government 457(b) plans may be amended to allow designated Roth contributions and in-plan rollovers to designated Roth accounts. This provides additional opportunities for tax-free growth of earnings. Those considering a Roth 457 plan can use the pre-tax vs. Roth calculator to determine the best option for their projected tax situation in retirement.
