Do You Know The Advantage of Having a 457(b) Plan?

The 457(b)

Have you been considering a 457(b) plan through your employer? 457(b) plans are very similar to a 401k or other employer offered plans. They are typically for governmental employees. The 457(b) plan allows you to deposit and save money into the plan pre-tax, lowering your taxable income each year, and grow tax deferred. This allows your money to accumulate faster than if it were taxed each year. There have a few key differences between 401(k) and 457(b) plans that are important to know.

The Advantage

One big one is if you leave your current employment and don’t find a new job for a prolonged period and you want to take money out of the plan. There isn’t a 10% penalty like there is in a 401(k) or an IRA if you are younger than 59 1/2. Another key component is the amount of catch-up contributions you can make. You can make a normal catch up contribution if you are over age 50 of $6,500, but when you are three years away from your retirement date you can double your normal contribution amount. In 2020, the additional contribution limit with the catch-up would allow you to contribute $26,000, but if you are within 3 years of retirement you could contribute up to $39,000 assuming that’s not more than 100% of your income. The $39,000 doesn’t even include any employer match, if you are lucky enough to have one. The final advantage with this plan is when you have both a 457(b) and 401(k) available, you can contribute to both! You can max your 457(b) and your 401(k) in the same year being able to save a significant amount of money in a tax deferred vehicle.

Summary

The 457(b) plans in all intents and purpose is very similar to 401(k), you can hold mutual funds or ETF’s, you get a reduction in income the year the contribution is made, and you get to grow your money tax deferred. They do have the key advantages of having no penalty for early withdrawal if you separate, very high “pre-retiree” contributions, and the ability to contribute to an additional employer sponsored plan. If you can contribute to a 457(b) you should try your best to take advantage of everything, they give you the ability to use. The biggest key to all retirement planning though is simply saving on the front end. Make a budget and figure how much you can afford to contribute.