What is a 457(b) Plan & Is It Right For You?
457s are nonqualified, tax-advantaged deferred compensation savings plans for government employees. Workers such as law enforcement officials, public school teachers, local city employees, and first responders may use a 457 to save for retirement. Individuals who work for a tax-exempt organization may also use 457s to save for retirement. Healthcare workers who work in state and local government healthcare organizations may also use 457 plans to save for retirement.
In this article, we’ll go over the definition and types of 457(b) plans and the 457(b) disadvantages and advantages. When you finish reading, you’ll have a better understanding of the pros and cons of putting your money to work for you in a 457(b).
What is a 457(b)?
A 457(b) deferred compensation plan allows workers to put away money in a retirement account. It also offers tax advantages that allow you to grow your savings tax-deferred over the course of your working years. You can pay taxes on the money before you put it in so you don’t have to pay taxes on the withdrawals.
The contribution limit for a 457(b) is $22,500 for 2023 for workers under age 50. You can also contribute an additional $7,500 in 2023 if you’re 50 or older.
Workers can save extra money starting three years before the “normal retirement age.” In fact, they can contribute as much as twice the limit, or $45,000, for 2023. The amount can vary depending on the organization you work for.
Take a look a the table below to get an overview of the possible amount you can save if you have a 457(b):
457(b) Plan Contribution Limits, 2023
|Worker age||Additional “Catch-up” Amount||Total Contribution Limit|
|Up to age 50||None||$22,500|
|50 and older||$7,500||$30,000|
|Within three years of the retirement age set in your plan||Double the current contribution limit of $22,500||$45,000|
Types of 457 (b) plans
There are two types of 457(b) plans: governmental and nongovernmental plans. They are both deferred contribution plans but both have one major difference: governmental plans are backed by the government and nongovernmental plans are those backed by an individual company.
- Governmental 457(b) plans: These plans are less risky because they’re not tied to an individual company. Individual companies can risk failure. In these types of companies, the money goes into a trust. You can roll these 457(b) plans into an IRA or 401(k) later on.
- Nongovernmental 457(b) plans: These plans, backed by your employer, are riskier. Your employer owns the account and adds the amount you ask them to on a regular basis. Money is subject to your employer’s creditors and is not held in a trust. In short, governmental 457(b) plans are protected if the business fails, while nongovernmental plans are not — they stay as the property of the business until distribution.
Benefits of 457(b) plans
Let’s take a quick look at the benefits of a 457(b) plan.
- Early withdrawals: You can make early penalty-free withdrawals before the age of 59 ½ (as long as you don’t work for that employer anymore. However, you will pay taxes on the amount you withdraw, so think twice before you withdraw your money. You may want to keep it in your account to compound and grow your nest egg instead.
- Savings options prior to retirement: Saving money prior to the normal retirement age can help you double down on your savings efforts. During these three years, employees can contribute twice the normal elective deferral limit or the sum of the current year’s ceiling, plus unused portions from prior years.
- Tax benefits: You can contribute to other types of retirement accounts, such as a 401(k) or 403(b) plus your 457(b) plan. You can use this method to defer a lot of taxes and reach your retirement savings goals. Doubling your contribution limit in the final three years before retirement age can also help you commit to even more tax-deferred benefits.
Disadvantages of 457(b) plans
It’s a good idea to examine a few disadvantages of 457(b) plan options before you choose this option. Let’s take a look.
- Not as many investment options: 401(k)s typically offer more investment options than 457(b) plans. If you aren’t amazed by the array of investment options through a 457(b), you may want to consider other investment vehicles, including index funds, Roth IRAs, and more.
- May want to skip rollovers: Rolling over to a traditional IRA means you could lose penalty-free early withdrawals. It’s better to ask your employer if you can leave the account open until you are ready to take your distributions, which can be tricky if you have a nongovernmental account and you leave your job.
- Lower contribution limits: You can take advantage of much higher contribution limits in a 401(k) plan. For example, employer matching and employee contributions, and catch-up contributions are $73,500.
- No matching contributions: You may not be able to take advantage of a matching program with a 457(b). Employees must make sure they save enough money themselves.
Choosing the right retirement plan for you
When it comes to retirement plans, there’s no one “right” answer for everyone. It depends on a wide number of factors, including your retirement savings goals, how you want to withdraw your money in retirement, and more.
Carefully research different retirement plans before you decide on the retirement plan that fits your needs. You may want to consider a couple of retirement plan types alongside your 457(b).
A financial advisor may be able to help you make the right decisions about retirement plans based on your career as a health care provider. Financial advisors can offer helpful advice on other financial decisions as well, from life insurance to saving for college.