What You Need to Know About Your 457 Plan For a Successful Retirement

Joseph Meyer
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457 Contribution Limits

So, you're enrolled in a government retirement plan and have a lot going for you, including tax deferred status on the money you contribute and tax-deductible contributions for most employers.

But a key thing to remember is that with the exception of special changes, such as eligibility for government pensions, your government plan will not continue to cover you for retirement.

Here is why. A government plan is considered sheltered if it is a 403(b), a 401k, or an IRA. These are all defined-contribution plans and will only continue to be defined-contribution plans.

If you are in a government plan like a 457 however, it is considered an un-sheltered plan. This means you no longer have any tax advantages or tax deferral. This makes your money much more sensitive to fluctuations in the market and means that you have to be careful how you invest it.

Catch Up Contribution Limits for 457 Plans

Early Withdrawals from a 457 Plan

457 plans are similar to 401(k) plans in that they offer tax advantages to employees who contribute to their plans, and to employers who sponsor the plans. 457 plans are considered defined benefit plans. The money you put into your plan is tax-deferred and can be taken out whenever you wish, as long as you leave the money in the plan for five years.

457 plans are offered by state and local government agencies and by non-profit organizations. Most 457 plans have designs and policies similar to 401(k) plans, and many brokerage firms offer 457 plans for their clients.

Participants in 457 plans may take early withdrawals, but the penalty for early withdrawals is severe. Withdrawals before the age of 59.5 or in the first two years of plan participation are subject to a 10 percent tax penalty and are not eligible for capital gains tax rollover.

To qualify for penalty-free withdrawals from 457 plans, participants must leave the job to which the plan is tied or the 457 plan must be terminated. Also, participants who are the disabled, are in the military, or are judges involved in the court system are not subject to the early withdrawal penalties. Withdrawals before an employee reaches the age of 50 are subject to the provisions of the Internal Revenue Code.

Can Your Roll a 457 Plan Into an IRA?

A 457 plan isn’t required to have a distribution in the year you leave your employer. Some plans do offer an option to distribute your 457 in the year you leave your employer. Otherwise it’s a pretty simple process to roll over your 457 into an IRA. It’s just like rolling over your 401(k) plan.

If you have access to the plan, you can find out how much is currently in your 457 by going to the company’s benefits page on its website or calling the human resources department. To roll over your 457 plan into an IRA, you need to call the plan administrator or broker and they’ll transfer the funds to the new account based off of your instructions.

There is one thing to be aware of regarding the rollover. There may be a tax consequence for the 457 rollover if you’re not careful. You need to be aware of the annual vesting schedule for your 457. Most plans only vest 20% per year. So if you’ve earned, say, 72% of your plan, you may be liable for tax on that portion.