What Is a 457 Plan?
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What Is a 457 Plan?
A 457 plan is a type of defined contribution retirement plan. There are two types of them: governmental and non-governmental. They were traditionally offered to state and local public employees (governmental), but were later expanded to include some nonprofit organizations (non-governmental). Therefore, you must be employed by a state or local government or a tax-exempt 501(c) organization to participate in one. Most non-governmental plans are not available to all employees, however. They are limited to highly compensated employees such as officers. The actual level of compensation is set by the company.
Things To Know
- You must be employed by a state or local government or a tax-exempt 501(c) organization to participate in a 457 plan.
- There are tax advantages to having a 457 plan.
What kinds of organizations participate in 457s?
You can have a 457 set up for you if you work for organizations such as these:
- Public schools
- Hospitals
- Labor unions
- Certain tax-exempt cooperatives
- Charitable foundations and organizations
- Trade associations
You get tax benefits with a 457
As mentioned earlier, there are some tax advantages to having a 457 plan. You are not taxed on the money that you divert into your plan, making it pre-tax. Also, it grows tax-deferred while it is in the plan. You do not need to pay taxes on any earnings that you gain, as long as they are reinvested into the plan. When it comes time to take withdrawals from your plan, they will be taxed as ordinary income.
An advantage of having a 457 plan is that if your organization also offers a 403(b) or 401(k) plan, you can participate in both. As with all other retirement plans, there are various types of investments, such as mutual funds, that are available to fund your plan.
Contribution limits
For 2025, you can contribute up to $23,500. Any future increases will be indexed to inflation. This contribution amount applies to both governmental and non-governmental plans. If you are 50 or over, you can contribute an additional $7,500 per year. But these catch-up contributions are only allowed in governmental plans.
Another catchup bonus: starting in 2025, if you are 60 to 63 years old, your maximum is $11,250 instead of $7,500. This is due to recent legislation aiming to help employees save more.
Roth plans
A governmental 457(b) plan may be amended to allow designated Roth contributions and in-plan rollovers to designated Roth accounts.