What is a 457 Retirement Plan?
A 457 retirement plan is a non-qualified (i.e. does not need to meet the restrictions set up by IRS under section 401) deferred compensation plan for government employees and tax-exempt organizations. The plan designed to comply with the rules of Internal Revenue Code section 457 is referred to as a Section 457 retirement plan. Employees are allowed to defer compensation on a pre-tax basis through payroll deductions that further allows them to defer federal and sometimes state taxes until the assets are withdrawn. In effect, a 457 retirement is quite similar to a 401k plan used by for-profit employers.
Participants in the Section 457 retirement plan can defer income up to 100% of the employee’s compensation limited to an annual amount set by IRS–$15,500 for 2008 plus a $5,000 catch-up contribution for people age 50+.
The types of entities that can establish a 457 retirement plan are states, subdivisions of states, instrumentalities or political subdivisions of states, or any entity other than a governmental unit that is exempt from federal income taxes. Governmental units that are exempt from federal income taxes include the following types of organizations:
charitable organizations
religious organizations
educational organizations
private hospitals
private foundations
labor unions
trade associations
fraternal orders
farmers cooperatives
Note that these tax exempt entities may also have a 401k plan for their employees and the employees may contribute to both plans up to the $15,500 maximum for each. There are no contributions by the employer with 457 retirement plans as there are with 401k plans. Additionally, your account in a 457 retirement plan can be rolled over just like a 401k, into an IRA or other qualifying tax sheltered plans. Unlike a 401k, if you retire or leave an employer before age 59 1/2, there is no 10% penalty for accessing your 457 retirement plan balance. Typically, employers that provide a 457 retirement plan will also provide assistant from retirement consultants to help understand the intricacies.
Below is a chart showing the differences and similarities between a 457 retirement plan and 401k plan. If you are eligible to participate in a 457 retirement plan, the decision to contribute would be part of the considerations of your whole retirement income plan.
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September 27th, 2008 at 1:46 pm
Very helpful information on 457 plans and retirement. Thank you.
Another helpful site for tips and news on retirement plans and IRA’s is retirementthink.com
October 14th, 2008 at 11:16 pm
Retirement benefits for highly paid executives participating in plans offered to all employees of a nonprofit organization, such as a traditional pension plan tend to have various limits on the amounts that executives or their associations can contribute. Additional benefits for association executives take a number of forms.
November 3rd, 2008 at 4:08 am
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November 3rd, 2008 at 11:59 pm
Very interesting information and post. Yout got into good details. I know about this subject to some extent but I had no idea that participants in the Section 457 retirement plan can defer income up to 100% of the employee’s compensation. I know it’s limited but that is something I never knew and many people may not.
Nice post and keep them coming!
January 5th, 2010 at 5:55 am
finally now im understand what a 457 Retirement Plan is through this article. thanks to share
March 27th, 2010 at 12:16 pm
Nice write up. I thin kthe most valid consideration is in whether or not the recipient understands all of this on their own. Most people like to seek the help of a seasoned financial professional to assist in planning like this.
August 12th, 2010 at 1:28 am
This 457 retirement plan provides benefit to government employees as well as employees of tax exempt organizations.