What is a 457(b) Plan?

If you’re an employee of a city, county, township, park board, water district or similar entity, your employer may offer a tax-exempt savings benefit known as a government 457(b) deferred compensation plan.

These plans accept payroll-deducted contributions for participant-directed investing and are intended to help public employees like you meet long-term objectives, such as generating retirement income. Check out this article for answers to some frequently asked questions about deferred comp plans.

How do 457(b) plans work?

As a 457(b) plan participant, you contribute salary reductions – or "deferrals" – which are placed in a participant-directed account. Contributions are limited to an annual maximum dollar amount, as established under the Internal Revenue Code (IRC).

Once in your account, you have to decide where you want to invest your contributions from options selected by your employer, the plan sponsor. Investing involves market risk, including possible loss of principal. As you get started in the plan, we'll help you understand market risk and strategies that may help you deal with it.

Learn more about the three steps to participating in a deferred comp plan.

Why should you participate in a 457(b) plan?

You may get significant advantages for participants in a 457(b) plan:

  • Your contributions and any earnings to a 457(b) plan are tax-deferred
  • Your money has the chance to potentially grow with the power of time and compounding
  • You may be eligible to take a tax credit (Saver’s Credit) for elective deferrals contributed to your account
  • You may take an unforeseeable emergency withdrawal, as long as certain qualifications are met
  • You may become eligible for a loan at competitive rates
  • With certain exceptions, your account is protected by law from anyone, including your employer, taking control of your assets

You will pay ordinary income tax when and as you withdraw from your plan account.

Can a 457(b) plan include designated Roth accounts?

A governmental 457(b) plan may allow you to designate Roth contributions and receive in-plan rollovers to designate Roth accounts, so that you may take tax-free withdrawals. A Retirement Specialist can explain the criteria you must meet for tax free withdrawals and let you know if the Roth 457 is available in your plan.

Can I participate in both a 457(b) and a 403(b) or 401(k) plan?

In most cases, yes. And you may be able to contribute up the maximum amount allowed by the IRC. There are certain conditions to meet, which can be explained by your Retirement Specialist, if your employer offers both types of plans.

Not all 457(b) plans are governmental 457(b) plans

Certain non-governmental tax-exempt entities may establish 457(b) deferred compensation plans, but they operate under different rules. Assets of these 457(b) plans may not be transferred to or rolled into governmental 457(b) plans.

Get the help you need

Talk with a Retirement Specialist if you have questions about 457(b) plans or plan participation. Information provided by Retirement Specialists is for educational purposes only and is not intended as tax or investment advice.

Source: "IRC 457(b) Deferred Compensation Plans", Internal Revenue Service, www.irs.gov (accessed Jan. 10, 2012)

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