457 Contribution

457 Contribution

A 457 contribution plan is a tax-deferred, incentivized retirement plan for government employees and non-government employees who work for certain non-profit corporations, hospitals, and other charitable organizations. The contributions employees make to 457 plans are not affected by contributions to other plans like 401k, 403b, or 408k plans.  Therefore, even if contributions have been made to other plans during the same year, the maximum allowed contribution amount for the 457 plan still applies and employees are not penalized for having made contributions to other qualified accounts.

There are, however, strict rules governing how much of the employee’s income can be contributed to the plan each year, as well as when the funds in the plan can be withdrawn. Under certain circumstances, loans can be taken against the balance, but they must be paid back in a specific amount of time or face a 10% tax penalty.

457 Plan Limits

The IRS governs tax-deferred retirement programs, and the rules for the 457 plan are similar to other such retirement plans, including the most well-know retirement program, the 401 (k). Where the 401 (k) is designed to meet the needs of large, for-profit corporations, the 457 plan is designed for non-profits and government agencies. The maximum amount the IRS will allow employees to contribute to the plan depends upon the age of the employee. For employees who will be 49 years old or younger at the end of the tax year, 457 contribution limits allow a maximum of $16,500 per year. Employees who will be 50 or older by the end of the tax year who have under-contributed to their retirement plan are allowed to make catch-up contributions which amount to an additional $5,500, or 457 limits of $22,000 in tax-free retirement plan contributions per year.

For employees who are within three years of normal retirement age, the contribution limits are extended further. Employees who are within the three-year period and have under-contributed to their retirement are allowed to make “double catch-up” contributions, which allow them to contribute an additional $16,500 each year for a maximum 457 contribution limit of $33,000 in tax-deferred contributions each year through retirement.

Contributions to the plan are made pre-tax and reduce taxable gross income, thereby reducing the employee’s tax burden. If the employee is contributing to a governmental 457 plan, also called a 457b, an additional Retirement Savings Contribution Credit may be available to the employee when filing a tax return. Like 401k plans, deductions are usually taken directly from the employee’s paycheck, so the plan is typically set up ahead of time.

Advantages of a 457 Plan

Any of the contributions made by the employee to the 457 plan, as well as additional contributions made by the employer to the employee’s account on a 457 plan, are not affected by contributions made to other plans, which allows the employee to make significant contributions toward his or her own retirement without any kind of tax penalty.
Tim Ord
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