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457 plans are retirement savings vehicles that can be established by state and local governments, public schools and tax-exempt organizations as described in IRS code section 501(c)(3) such as nonprofit hospitals and charities. Church and church-controlled organizations are specifically excluded from sponsoring a 457 plan.
A 457 plan is a deferred compensation plan that lets individuals save for retirement with pretax salary deferrals while reducing their taxable income.
Three types of 457 plans are available
Benefits of a Governmental 457(b)
Governmental 457(b) Contributions
Contributions to governmental 457(b) plans can realize some tax benefits. For example:
Governmental 457(b) Contribution Limits
Similar to most retirement savings accounts, contribution limits can change each year. Total contributions, including both employee salary deferrals and employer contributions, cannot exceed the lesser of 100% of the employee's compensation or the applicable limit below. To be eligible for a catch-up contribution, individuals must be age 50 or older by year-end.
|Year||Deferral Limit||Catch-up (age 50 or older)|
Governmental 457(b) Catch-up Contributions - 2 Different Types
A governmental 457(b) Plan has two different types of catch-up contributions:
Participating in a 457 Plan and Another Retirement Plan
Employers can choose to maintain a 401(k), 403(b) or 457 individually or they can choose to pair a 401(k) plan with a 457 plan or pair a 403(b) plan with a 457 plan. When an individual participates in more than one salary deferral plan, their employee salary deferral contributions to both plans are usually limited to the 402(g) limit, which is $19,000 (2019) and $19,500 (2020).
However, the 457 plan is not subject to the 402(g) limit. This allows individuals, who are participating in a 457 plan in addition to another salary deferral plan to contribute up to the salary deferral limit in each plan. For this reason, many public school districts have decided to offer governmental 457(b) plans in addition to an existing 403(b) or 401(k) plan, to allow employees to take advantage of the contributions limits in both plans, potentially doubling their salary deferral contributions.
Three of the biggest differences between governmental 457(b) plans and 401(k)/403(b) plans are:
Governmental 457(b) Plan Withdrawal Requirements and Distributions
Typically, a distribution from a governmental 457(b) plan can occur only as a result of a specific triggering event.
Depending upon plan provisions, it may be possible to distribute account balances of less than $5,000 (excluding rollover dollars) where the participant has not actively contributed to the plan for two years.
Taxation of Distributions
Determining what's taxable when taking a distribution from a governmental 457(b) will depend on what type of money is in the plan. Of course, eligible rollovers to an IRA are not subject to taxation.
Required Minimum Distributions
Generally, individuals must begin taking a required minimum distribution (RMD) from their plan in the year they turn 70 ½ (for individuals who attained this age in tax year 2019 or prior) or age 72 (beginning in tax year 2020) and each subsequent year. Individuals who are still working with the employer sponsoring the plan may delay their RMDs until April 1 of the year following retirement if the option is available in their plan.
Our financial advisors will work closely with you to evaluate all of the retirement options available to you. We invite you to meet with an Edward Jones financial advisor and get started today.
This information is for educational purposes only. Edward Jones, its employees and financial advisors cannot provide tax or legal advice.