However, total contributions to a 457(b) plan can’t exceed the lesser of 100% of your includible compensation for the year or the deferral limits. Your employer can match your contribution, but that would count toward your annual limit. Some employers offer both a 457 plan and a 401(k) plan or a 403(b) plan for their employees. In this situation, employees can contribute up to the annual maximum for both plans.
Basics of Section 457 Plans
These plans are non-qualified, tax-advantaged retirement plans, and many taxpayers invest in them to supplement their Social Security and pension income in retirement. There are two types of 457 plans: 457(b) and 457(f). A 457(b) plan is usually available to local and state government workers and those employed by tax-exempt organizations. Less common are 457(f) plans, which are offered to top-level employees and some non-government employees. Federal government employees have Thrift Savings Plans instead. You can make contributions to your plan with pre-tax dollars, which reduces your taxable income and can result in a decreased tax bill, particularly when you make annual contributions up to the limit. The money and its earnings are taxable, however, when you make withdrawals in retirement. You may also have the option to invest after-tax dollars. These are considered Roth contributions, and you can withdraw them tax-free in retirement, but not all employers offer this option. Employers that offer it will provide you with various investment options for the money in your plan, and you can choose from among them. You can take withdrawals when you stop working, and you can usually roll your account into another retirement account, such as an IRA, if you change jobs. You’ll also have the option to leave your money where it is or cash out the plan. Additionally, you can name a beneficiary or beneficiaries to receive the account assets upon your death.
Section 457 Plan Contribution Limits by Year
Section 457 Plan Catch-Up Contributions
One unique feature of some 457 plans is what is called the “three-year rule.” Normally, you would only be able to make catch-up contributions after reaching age 50, but 457 plans allow you to start three years before reaching the retirement age set by your plan. If your plan sets the retirement age at 51, for instance, the three-year rule allows you to make catch-up contributions at age 48. However, you can’t make special catch-up contributions and the over-50 catch-up contributions at the same time.
Designated Roth Accounts in 457 Plans
Employers have been permitted to offer designated Roth accounts inside their 457 deferred compensation plans since 2010. The Small Business Jobs Act of 2010 enabled employers to revise their plans to allow employees to place salary deferrals into a designated post-tax Roth account and to permit employees to convert their pre-tax savings into a post-tax Roth. Before this, 457 plans held only tax-deferred accounts. The combined contributions to both Roth accounts and pre-tax accounts must not exceed the yearly limit.
