It can be a challenge to stay informed about all the intricacies employer retirement plans. Many are familiar with 401k plans and 403b plans, but most are unfamiliar with 457 plans. Just exactly what is a 457 retirement plan? Here is some helpful information to guide you in answering that question.

The concept of 457 plans is essentially the same as that of 401k or 403b plans. The primary difference between the plans is that 401k plans are meant for private employees, 403b plans are meant for non-profit and education employees, and 457 plans are meant for city, state, and other governmental employees. There are some key differences between these plans, though, and it is important to understand them if you are faced with options for your retirement savings.

What 457 plans have in common with 401k and 403b plans is the opportunity to defer taxes on pre-tax contributions to retirement savings. A 457 is a deferred compensation retirement plan that allows employees to set aside part of their income in a tax-deferred savings account. That means the money you set aside, and any interest or earnings that money accumulates, will not be taxed until retirement.

457 plans differ from 401k plans in that there is no minimum retirement age or early withdrawal penalty for 457 plans. Furthermore, independent contractors can be eligible to participate in 457 plans, while they cannot participate in 401k and 403b plans. Furthermore, 457 participants cannot make contributions to Roth IRAs the way participants in other plans can, though most 457 plans can be rolled over into an IRA account like 401k plans and 403b plans.

When an employer offers a 457 plan as well as either a 401k or a 403b plan, employees are allowed to contribute to both. Legislation passed 2001 changed the regulations about contribution limits so that employees can now make the mandated maximum contributions to both plans. The law also allows two ways in which 457 participants over fifty can “catch up” with contribution limits, but employers do not contribute to 457 plans like they do with 401k or 403b plans.

Non-governmental organizations can participate in some forms of 457 plans. Non-governmental 457b plans are available for employees earning at or above designated salary thresholds set by the employer. These plans allow executives, directors, and other highly paid employees to defer state and federal income tax on contributions they make during their peak earning years. Such plans are not allowed to be rolled over into IRA plans.

The 457f plan allows some non-profit organizations an opportunity to supplement retirement income for some employees. These plans do not carry contribution limits, but the contributions remain the property of the employer until they are distributed upon retirement. The contributions are only tax deferred only as long as the employee faces a “substantial risk of forfeiture”, meaning the money remains available to the employer’s creditors and the employee is required to meet vesting requirements to be eligible for distributions.

There are a lot of complex regulations about retirement accounts. Whatever plan your employer might offer, it is important to seek out qualified advice when planning your contributions and plan participation. But you be much better equipped to make solid choices for yourself if you know just what is a 457 retirement plan.

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