If you work for a state or local government you may be able to
contribute to a retirement account known as a 457(b) plan.
If you have such a plan, consider yourself fortunate, because
it’s a great way to help build assets for retirement. But 457(b)
plan provisions can vary between plans, so you’ll want to know
exactly what your plan offers
– and how you can take full advantage of it.
If you work for a state or local government you may be able to contribute to a retirement account known as a 457(b) plan.
If you have such a plan, consider yourself fortunate, because it’s a great way to help build assets for retirement. But 457(b) plan provisions can vary between plans, so you’ll want to know exactly what your plan offers – and how you can take full advantage of it.
All 457(b) plans offer some key tax advantages to participants. Your earnings grow tax-deferred, which means your money will accumulate faster than it would if it were placed in an investment on which you pay taxes every year.
Plus, you typically make “pre-tax” contributions to a 457(b) plan, so your adjusted gross income will be reduced. Also, you typically have a choice of several different types of investments with which to fund your 457(b) plan.
But beyond these basic similarities, there are some important variations between the plans – and you might need to know these differences, because some employers can offer a 457(b) plan – plus a 403(b).
If you are offered a 403(b) along with your 457(b) plan, you have some interesting options. You could split your contributions between the plans or, if you can afford it, you could put in the maximum to both plans.
If you choose to participate in both plans, you could gain some plan-specific advantages. For example, a 403(b) plan provides less restrictive hardship withdrawal provisions, while a 457(b) plan allows you to make penalty-free withdrawals from your account after you leave your job and before you turn 59 1/2. (These penalty-free withdrawals do not apply to amounts you may have rolled over to your 457(b) from other plans.)
It’s nice to have a choice of retirement plans, but even if you just have a 457(b) plan, you can benefit from some attractive new features, thanks to new tax laws. Consider the following:
– Catch-up contributions: If you have a governmental 457(b) plan, and you’re 50 or over, you can now make “catch-up” contributions that allow you to exceed the normal pre-tax contribution limit.
In 2003, that limit is $12,000, along with a $2,000 “catch-up” contribution, for a total of $14,000. Both the normal contribution limit and the catch-up limit will increase every year until 2006.
Portability: Your governmental 457(b) plan is now more “portable” – so you can pretty much take it with you wherever you go. You can now “roll over” your plan’s assets to an IRA or to your new employer’s tax-qualified plan, such as a 401(k) or a 403(b).
There are other types of 457 plans. State and local governments may offer a 457(b) to all employees, while tax-exempt organizations might offer a different 457(b) to upper management and highly-compensated employees.
To complicate matters, both types of employers can offer a 457(f) plan – sometimes called a “top-hat” plan – to top-level employees.
The pre-tax contribution limit is the same for both types of 457(b) plans. However, if you work for a tax-exempt group, rather than the government, your 457(b) plan does not offer the “catch-up” provision, or the rollover provision.
Financial Focus is provided by Mark Vivian, a representative of Edward Jones Financial Services. His office is at 615 San Benito St., Suite 105. Phone 634-0694.
