The 457(b) retirement plan is a significant option for those in public service and specific non-profit sectors. This plan, tailored for civil servants, municipal workers, law enforcement, and public safety personnel, extends to hospital executives, charities, unions, and select independent contractors linked with state and local governments. Understanding the 457(b) retirement plan's mechanics is crucial for those eligible to make informed financial decisions.

The 457(b) plan's tax advantage is its core. This plan allows participants to grow their retirement savings tax-efficiently, so capital gains taxes aren't applied to account transactions. This feature boosts retirement fund growth, making the 457(b) plan a good long-term savings option.

Contribution Types in 457(b) Plans

Contributions to a 457(b) plan come in two distinct forms: traditional and Roth. Under a standard 457(b) plan, contributions are pre-tax, directly reducing your taxable income. Traditional 457(b) contributions are pre-tax, lowering taxable income. These contributions are taxed upon retirement withdrawal.

However, the Roth 457(b) allows post-tax contributions and tax-free retirement withdrawals, including investment earnings. However, not all companies offer Roth, so check your plan.

457(b) Contribution Limits and Features

Annual Contribution Limits

The 457(b) plan caps employee and employer contributions at $22,500 in 2023. However, 457(b) plans rarely offer employer contributions. Over-50s can make catch-up contributions of up to $30,000 per year.

The primary contribution limit rises to $23,000 in 2024, and the catch-up limit for those over 50 is $30,500.

Unique Saving Opportunities

A distinctive feature of the 457(b) plan is the option for additional contributions in the years nearing retirement. Specifically, within three years of retirement, participants can contribute double the annual limit or their entire salary, whichever is less.

However, this opportunity is contingent upon having yet to max out contributions in previous years. This element introduces a strategic saving possibility but requires careful planning and record-keeping to remain within IRS guidelines.

Combined Contributions with Other Plans

Individuals with multiple employer-sponsored retirement plans, like 457(b) and 403(b), can maximize retirement savings. In 2023, eligible workers could contribute $22,500 to 457(b) and 403(b) plans.

Note that the $7,500 catch-up contribution cannot be applied to both programs for those 50 or older.

457(b) Retirement Plan Investment

Know your 457(b) retirement plan investment options and how they fit your long-term financial goals. Mutual funds and annuities are usually available in 457(b) plans, not ETFs or stocks. Though limited, this matches the investment strategies of many 401(k) participants using mutual funds.

Structuring Your Portfolio

For a balanced approach, financial experts commonly suggest a three-fund portfolio, which typically includes domestic, international, and bonds.

When you're younger, a more significant portion of your portfolio is often recommended to be in stock-based funds, as they offer more substantial growth potential over time.

As you approach retirement, shifting towards more bond-based, conservative investments can help protect your savings from market volatility.

Supplementing with an IRA

An Individual Retirement Account may supplement your 457(b) plan if it doesn't meet your needs. IRAs offer more investments, including ETFs and stocks.

However, they come with lower contribution limits than 457(b) plans. Balancing contributions between your 457(b) and an IRA can be a strategic way to diversify your investments while taking advantage of the unique tax benefits each offers.

457(b) Withdrawals

Understanding 457(b) withdrawal rules and their financial effects is crucial. If you quit your job, 457(b) plans allow penalty-free withdrawals regardless of age, unlike most retirement plans. However, income tax applies to withdrawals.

Accessing your 457(b) funds can be more challenging if you're still employed. Generally, in-service withdrawals are restricted to cases of severe financial hardship, and not all plans permit them. This limitation ensures that your retirement savings are preserved for their intended purpose.

Depending on your plan, you can borrow against your 457(b) balance. Retirement savings borrowing can affect your financial health, so reconsider.

457(b) RMDs

Like many employer-sponsored retirement accounts, a 457b retirement plan necessitates minimum withdrawals once you reach a certain age. Specifically, at age 72, you're required to start withdrawing from your 457(b) program.

This rule applies unless you're still employed at the organization where your 457(b) is held. In such cases, you can delay these 457b withdrawal options until the April following your retirement year. An important note for those born before July 1, 1949: your RMDs must begin at age 70 ½.

This aspect of the 457b plan underscores the need for careful planning, especially as you approach retirement age. It's crucial to consider how these withdrawals fit into your broader retirement income strategy, balancing the need for current income with the desire to allow your assets to continue growing tax-deferred.

Comparison Between 457(b) and 403(b) Plans

Both 403(b) and 457b retirement plans are popular among public sector and non-profit employees, so compare them. There are similarities but also differences:

Employer Contributions

Both 457(b) and 403(b) plans allow employer contributions, but 401(k) are rare.

Contribution Maximums

Both plans permit the same amount of employee contributions. However, 403(b) plans have a higher ceiling when considering employer contributions. Maximizing employee contributions can significantly enhance your retirement savings if you can access both.

Catchup Contributions

Here, the plans diverge. The 457(b) offers a unique opportunity to contribute double the limit in the three years before the average retirement age. In contrast, the 403(b) plan allows for additional contributions for long-term employees (up to $15,000 total for those with 15 years of service).

Early Withdrawals

The 457b withdrawal rules are more lenient than the 403(b) plans. Regardless of age, you can start taking money from your 457(b) when you leave your employer. 403(b) plans, while allowing withdrawals at 59 ½, have more limited early 457b withdrawal options.

Is The 457(b) Plan Right For You?

Investing in a 457b retirement plan is a strategic decision for building your future wealth. The plan's special catchup contribution allowances are particularly beneficial as you near retirement, offering a chance to boost your retirement savings significantly.

However, the 457b plan typically presents more limited investment options than other plans. Additionally, due to stringent withdrawal restrictions, accessing your funds while still employed can be more challenging.