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457 Retirement Plans for Public-Sector Employees

If you were employed by state or local government, or even by a tax-exempt organization under IRC 501(c), you know about 457 retirement plans.

While public sector employment is resuming in many parts of the country, if you were part of the large share of 25- to 54-year-old prime-age workers who lost a private sector job, it might be worth becoming more familiar with these types of plans.

Basically, 457(b) plans are similar in nature to 401(k) plans, known as defined contribution plans, designed for you to save for and supplement your future retirement income. And, like 401(k) plans; the value of your account is based on the contributions you make.

Your Hefren-Tillotson advisor is well versed in the intricacies of the retirement plans mentioned here and should be consulted for additional information.

The 411 on a 457(b)

Through salary reduction, state and local governmental employers or employees – police officers, firefighters, paramedics, public school teachers, government officers and municipal employees – can contribute up to the IRC 402(g) limit of $19,500 in years 2020 and 2021, on behalf of participants under the 457(b), the most common plan.

Pre-tax contributions reduce taxable income for the year and contribution limits cannot exceed the lesser of: 100% of the participant’s includible compensation or the elective deferral limit of $19,500.

You can make catch-up contributions when aged 50 or older. If permitted by your particular plan, the IRS allows special 457(b) contributions for a participant three (3) years prior to the normal retirement age (specified by the plan) to contribute to the lesser of:

  • Twice the annual limit of $39,000 in 2020 and 2021 tax years
  • The basic annual limit plus the amount of the basic limit not used in prior years, and only allowed if not using age 50 or over catch-up contributions

Highly compensated government employees and top executives at select charities are offered 457(f) plans. Both plans enjoy tax advantages as contributions and earnings on the retirement money are tax-deferred.

The 411 on a 403(b)

Also classified as a tax-advantaged retirement savings plan, 403(b) plans are typically offered to public employees and workers for non-governmental organizations. 403(b) plans are also knows as tax-sheltered annuity plans, and are for certain employees of public schools, employees of certain 501(c)(3) tax exempt organizations and certain ministers who meet the requirements. Employers may contribute to the plan but is not required to.

Assets in a 403(b) plan can be placed in any of the following investment types:

  • An annuity contract provided through an insurance company
  • A custodial account invested in mutual funds
  • A retirement income account set up for church employees

Similarly, between 403(b) plans and 401(k) plans, employers and employees can make contributions in a 403(b) plan and collect pre-tax contributions. Of course, regular income taxes must be paid when withdrawals are made in retirement.

In this regard, both the 457(b) and the 403(b) are similar —but the 457(b) doesn’t charge you an early withdrawal penalty if you decide to withdraw money when you leave your job. This lack of an early withdrawal penalty is one of the main differences between 403(b) vs. 457 (b) plans.

Can an Employer Offer Another Type of Plan?

You are allowed to contribute to two plans simultaneously and doubling your retirement contributions. Keep in mind, though, if you were saving through a 401(k) at a private company, and decided to become a public school teacher with a 457(b) in the same year, your total contributions across both plans cannot exceed $19,500 for 2020.

In a quick comparison of plans, 401(k) plans and 457(b) plans are defined contribution plans. However, 401(k) plans are only available to employees in the private sector. If you’re currently an employee of a state or local government, you cannot switch from a 457(b) to a 401(k) without changing jobs, according to SmartAsset.com.

Again, the 403(b) plan is very similar to the 457(b). Actually, public employees may have the option of choosing one or the other, or sometimes even both. If you experience a separation of service from your employment, and are without income, a 457(b) plan will allow you to withdraw funds from the account without an early withdrawal penalty.

457(b) plans are convenient and flexible in that they, too, can invest in a diversified target-date fund based on your age automatically, or a portfolio of stock and bonds handpicked by you based on the advice of your advisor.

You can roll over a 457(b) into any other retirement account, like a Roth IRA, Traditional IRA, SIMPLE or SEP IRA and more.

For help in answering your questions about 457(b) plans or other plans, contact us today at Hefren-Tillotson. We would be happy to help.

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