The 457(b) plan, sometimes known as a deferred compensation plan is a retirement plan that is generally set up by states, municipalities, colleges and universities for their employees. These plans have some similarities to their 401(k) and 403(b) counterparts, but they also have some differences that individuals with access to these plans may find advantageous.
First, let’s look at the similarities. The 457(b) allows the same deferral limits as a 401(k) or 403(b). These limits for 2016 are $18,000 annually for those under age 50. For those age 50 and over, the deferral limit is $18,000 plus an additional $6,000 catch-up for a total of $24,000 annually. 457(b) plans may allow for pre-tax or Roth contributions. Individuals can choose among a variety of funds that the plan offers. At age 70 ½ the plans will require RMDs (unless still employed). At retirement or separation from service, individuals are generally allowed to roll the money from their 457(b) to a traditional or Roth IRA. For a simple rollover chart from the IRS, click here.
Now let’s look at some of the differences. Unlike their 401(k) and 403(b) counterparts, 457(b) plans allow access to the individual’s money, without penalty, at any age, as long as the individual is separated from service. For example, if an individual who worked for a university for 10 years and saved to a 457(b) plan then retired at age 45, they would have access to their 457(b) plan money without incurring the 10% early withdrawal penalty. Taxes may be owed depending on whether contributions were made pre-tax or Roth. Additionally, in-service distributions are generally stricter in 457(b) plans.
One of the major differences with 457(b) plans is that they bypass the aggregation rules that apply to 401(k)s and 403(b)s. This means that individuals with both a 401(k) and a 403(b) are still limited to contributing a total of $18,000 or $24,000 (if age 50 or older) combined for both plans. An individual in this situation could elect to put the maximum in the 401(k) but then could not contribute to the 403(b). Or, they could contribute to both, but could not exceed their maximum based on age.
If an individual has both a 401(k) and 457(b), or a 403(b) and 457(b) they are allowed to contribute the maximum employee deferral to each plan. This means that someone aged 50 or older could contribute a maximum of $24,000 to each plan for a total of $48,000 – annually.
These are some of similarities and differences the 457(b) plan has compared to other retirement plans. If you find that you work for a state, municipality, or are a state university or college employee and would like more information on your 457(b) plan, don’t hesitate to reach out to us.