What is a 457 plan? A 457 plan is a type of defined contribution plan, for which employees of state and federal governments, agencies, and tax exempt organizations. Contributions made to the plan with pre-tax money, earnings, and contributions are tax deferred while under the plan, and contributions are generally made by the employee, although some plans do have contributions by employees as well.
What are the benefits of a 457 plan? There are several benefits to this type of plan, the first being that contributions are not considered part of an employees salary for the purpose of income tax. Earnings and contributions are able to grow tax deferred without any income tax reduction, and employee contributions and earnings are 100 percent vested. There is no penalty for distributions made before age 59 and a half, and the start of distributions can be delayed beyond the age of 70 and a half if the plan participant continues to work.
What are the potential drawbacks? The chief potential drawback of a 457 plan is that there are usually no employee contributions, and when these types of contributions are allowed, they usually have vested requirements. Distributions of earnings and contributions under the plan are also taxed at an ordinary income rate. It should be noted however, that distributions under the plan can occur before retirement age without penalty. As with most retirement savings plans, funds are not made available until termination of employment, retirement, death, or in the event of specific circumstances or unforeseen financial emergency as defined by the IRS.
Are there catch up contributions under a 457 plan? For employees aged 50 or older, catch up contributions can be made to a 457 plan annually, with a contribution cap that varies by plan. Unused deferrals from prior years are not needed in order to take advantage of the over 50 catch up plan, and these contributions are not included in the total plan contribution limit. This provision is applicable every year from age 50 until participation in the plan ceases.
Other employees can take advantage of a provision set in place by the IRS that allows them to make up for contributions that have not been previously deferred to your current employers deffered compensation plan. This catch up is applicable for any year since January 1st, 1979. The maximum amount allowed is 100 percent of total unused deferrals or $15,000.00, whichever amount is greater.
Retirement planning is an important step in ensuring financial stability for both yourself and future generations, and it is essential that you speak with your financial advisor before deciding to join this, or any other type of retirement plan.
Author Resource:-
Visit our site for estate planning attorney articles, guides and more information.
![[Valid RSS feed]](/images/icon_Rss.png "XML Feed For RSS"){kind=icon}
Category Rss Feed
Print This Article
Add To Favorites
