The Advantages of a 457 Retirement Plan
You and your employees might qualify for 457 retirement plans if you work for a state or local government or for certain tax-exempt organizations such as a charities, hospitals or unions. A 457 plan is sponsored by a governmental entity and a 457(b) plan is sponsored by a tax-exempt organization. Both 457 and 457(b) accounts come with some highly prized added benefits for employees.
Similar to 401(k) or 403(b) accounts, contributions to a 457 plan are taken from the employees’ paychecks on a pre-tax basis, which lowers employees’ taxable income. The contributions are invested in mutual funds, and interest and earnings on that money are not taxed until the employee withdraws the funds at retirement. Some employers may match the amount an employee contributes to a 457(b) plan up to a certain limit.
The biggest difference between a 457 plan and 401(k) or 403(b) plans is that employees who are leaving a job or retiring before age 59½ can withdraw their retirement funds without having to pay a 10 percent penalty fee.
The contribution limit for 2019, set by Internal Revenue Code (Code) Section 402(g), is $19,000, and up to an additional $6,000 for employees age 50 or older. Unlike other employer-sponsored retirement plans, employers can offer employees an opportunity to make catch up contributions (that are twice the annual limit) three years before normal retirement age. The amount an employee can contribute to a 457(b) plan each year cannot exceed 100 percent of the employee’s salary.
The 457(b) plan also can be offered with other plans. Teachers, for instance, may be offered both 403(b) and 457(b) plans and can contribute the maximum amount to both plans. However, at the same time, that doesn’t include catch-up contributions.
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