A 457(b) plan is a retirement savings account that allows employees of certain organizations to save money for retirement. The plan is sponsored by the employer, and the employee chooses how to invest the money in the account. This can be a great way to save for retirement, as contributions are made with pre-tax dollars and earnings grow tax-deferred.
In this article, we will provide an overview of 457(b) plans, including reviews, benefits, fees and ratings.
457(b): Benefits, Fees & Everything You Need to Know Table of Contents
What is a 457(b)?
A 457(b) is a retirement savings plan offered by many public and some private employers. It allows employees to set aside money from their paychecks before taxes are taken out. This lowers your taxable income, which can save you money at tax time.
How Does a 457(b) Work?
A 457(b) works by setting aside a portion of your salary into a retirement account. This account is then invested and grows over time. When you retire, you can withdraw the money from your account to help cover expenses.
How to Get a 457(b)
You can open a 457(b) with any financial institution that offers them. There are many online brokers that offer them as well. Once you have opened your account, you will need to make an initial contribution. The amount you contribute is up to you, but there are minimums required by the IRS. After your initial contribution, you can make additional contributions at any time.
What Are The Different Types of 457(b)s?
There are three different types of 457(b)s: pre-tax, Roth, and after-tax.
Pre-tax 457(b)s are the most common type. They allow you to contribute money on a pre-tax basis, which means that your contribution will lower your taxable income for the year.
Roth 457(b)s are less common, but they offer some advantages over pre-tax 457(b)s. With a Roth 457(b), you contribute money on an after-tax basis. This means that your contribution will not lower your taxable income for the year. However, the money in your Roth 457(b) will grow tax-free, and you will not have to pay taxes on it when you withdraw it in retirement.
After-tax 457(b)s are the least common type of 457(b). With an after-tax 457(b), you contribute money on an after-tax basis, just like with a Roth 457(b). However, the money in your after-tax 457(b) can be withdrawn tax-free at retirement.
What Are The Benefits of a 457(b)?
The benefits of a 457(b) are many and varied, but some of the most notable ones include:
Tax-deferred growth potential
One of the biggest advantages of a 457(b) is that it allows you to grow your money tax-deferred. This means that you won’t have to pay taxes on any of the investment gains until you retire and start withdrawing the money.
Another big benefit of a 457(b) is that you can withdraw the money tax-free once you reach retirement age. This can be a huge advantage if you’re in a higher tax bracket when you retire.
Employer matching contributions
Many employers will match a certain percentage of their employees’ 457(b) contributions. This is a great way to boost your savings, and it’s something you should take advantage of if your employer offers it.
Unlike some other retirement savings plans, a 457(b) allows you to withdraw the money before retirement if you need to. This can be a lifesaver in an emergency situation.
What Are The Disadvantages of a 457(b)?
Now that we know what a 457(b) is and how it works, let’s take a look at some of the potential disadvantages of this retirement savings plan.
One downside to 457(b) is that there are often high fees associated with these accounts. This can eat into your investment returns and reduce the overall amount of money you have saved for retirement.
Another potential drawback is that 457(b) accounts are often subject to state and local taxes. This means that you may not be able to take advantage of the federal tax breaks that are available with other retirement account types.
Finally, it’s important to remember that a 457(b) is a retirement account. This means that you will likely be penalized if you withdraw money from the account before you reach retirement age.
Who Are The Best 457(b) Providers – Names and Details?
The two biggest providers of 457(b) plans are Fidelity and TIAA-CREF. They both have over 20 years of experience administering these types of retirement accounts. Each provider has their own set of fees and investment options, so it’s important to compare them side-by-side to see which one is right for you.
Fidelity has a wide array of investment options, including index funds, mutual funds, and exchange-traded funds (ETFs). They also offer an extensive selection of retirement planning tools and resources. Their fees are very reasonable, and they even offer a free financial consultation to help you get started.
TIAA-CREF is a bit more expensive than Fidelity, but they offer a slightly different set of investment options. They’re also one of the only providers that offers annuities as an investment option. Their retirement planning tools and resources are very comprehensive, and their customer service is excellent.
What Commissions and Management Fees Come With 457(b)s?
Commissions are paid by the employer and are used to cover the costs of setting up and administering the plan. They can range from 0.25% to over a percent of the total assets in the plan, and are typically charged annually.
Management fees are paid by the participants and are used to cover the costs of investing the assets in the plan. These fees can range from 0.20% to over two percent of the total assets in the plan, and are typically charged quarterly.
What Is The Minimum Amount Required to Open a 457(b)?
The minimum amount required to open a 457(b) account is $200.
What Are The Eligibility Requirements for a 457(b)?
To be eligible for a 457(b), you must work for a state or local government agency, a non-profit organization, or certain educational institutions. You must also be a “key employee” as defined by your employer.
How Much Can You Contribute to a 457(b)?
The IRS allows you to contribute up to $18,500 per year to a 457(b) plan. If you’re over the age of 50, you can contribute an additional $6000 per year. This is known as “catch-up” contributions. Your employer may also make contributions on your behalf, but this is not required.
What is The 457(b) Contribution Deadline?
The 457(b) contribution deadline is the last day you can contribute money to your 457(b) account for the year. The contribution deadline is usually December 31st, but it can vary depending on your employer’s plan.
For example, if your employer offers a “catch-up” provision, you may be able to contribute additional money to your 457(b) account after the December 31st deadline.
What Are Some Alternatives to a 457(b)?
If you’re not eligible for a 457(b), there are still other retirement savings options available to you. A few alternatives include:
- Roth IRA
- SEP IRA
- SIMPLE IRA
Each of these has their own set of benefits and drawbacks, so it’s important to do your own research to see which one best suits your needs.
How Does a 457(b) Compare to a 401k?
A 457(b) plan is very similar to a 401k in many ways. Both are retirement savings plans that offer tax-deferred growth and employer contributions. The main difference between the two is that a 457(b) plan can be used by government employees and non-profit employees, while a 401k is only available to for-profit employees.
Another difference between a 457(b) and a 401k is that the contribution limits are higher for a 457(b). For 2022, the contribution limit for a 457(b) is $19,000, while the contribution limit for a 401k is only $18,500. This means that you can save more money in a 457(b) plan than in a 401k plan.
Finally, there are some different rules regarding withdrawals from a 457(b) plan. Withdrawals from a 457(b) plan are subject to income taxes, while withdrawals from a 401k are not. Additionally, you can begin taking withdrawals from a 457(b) plan at age 55, while you must wait until age 59 ½ to begin taking withdrawals from a 401k.
What Is The Difference Between a Traditional IRA & a 457(b)?
The 457(b) is a retirement savings plan that is sponsored by an employer. The traditional IRA is an individual retirement account that you open and fund yourself. Both types of accounts have different rules and benefits.
The biggest difference between the two types of accounts is how they are taxed. With a traditional IRA, you get a tax deduction for the money that you contribute. With a 457(b), you do not get a tax deduction for your contributions.
Another difference is that with a traditional IRA, you can take distributions at any time after age 59 ½. With a 457(b), you can only take distributions after you leave your job or after age 70 ½.
There are some other differences between the two types of accounts, but those are the main ones. If you’re trying to decide which one is right for you, it’s important to talk to a financial advisor.
When Can You Withdraw Money From a 457(b)?
You can withdraw money from a 457(b) at any time, but there may be taxes and penalties associated with early withdrawals. Withdrawals are subject to ordinary income tax, and if you’re under age 59½, you may also be subject to a ten percent federal penalty tax. You should consult with a financial advisor to see if withdrawing money from your 457(b) is the right move for you.
When Should You Open a 457(b)?
You can open a 457(b) at any time, but there are some key times when it makes sense to do so. For example, if you’re about to start a new job, you may want to open a 457(b) as soon as possible. This will allow you to start saving for retirement right away and take advantage of any employer matching contributions.
If you’re already employed, you can still open a 457(b) at any time. However, it may make more sense to wait until you’re eligible for a salary increase or bonus. This way, you can contribute more money to your account and get a head start on saving for retirement.
Regardless of when you open a 457(b), the sooner you start contributing, the better. Time is one of the most important factors in building a successful retirement savings account. The sooner you start saving, the more time your money has to grow.
Is It Easy to Switch to a 457(b)?
The answer is maybe. If you’re currently employed by a government or non-profit organization, then you may be able to rollover your 403(b) into a 457(b). However, if you’re currently working for a private company, then you would have to take a distribution from your 403(b), pay taxes on the money, and then roll it over into a 457(b).
Another thing to consider is that there may be fees associated with rolling over your 403(b) into a 457(b). So, you’ll want to weigh the pros and cons and decide if it’s worth it for you.
At the end of the day, the decision of whether or not to switch to a 457(b) is up to you. But, hopefully, this guide has given you some helpful information to make an informed decision.
Can You Lose Money With a 457(b)?
The answer is yes – if the stock market crashes, you will lose money with a 457(b). However, over the long term, stocks have always trended upwards, so your chances of making money are much greater than losing money. Fees can also eat into your returns, so it’s important to understand what you’re paying and whether it’s worth it.
How Much Should You Contribute to a 457(b)?
The contribution limit for a 457(b) is the lesser of:
- 100% of your eligible compensation
- $19,000 (for 2020).
You can make catch-up contributions if you’re age 50 or older. For 2022, the catch-up contribution limit is $6000.
Does a 457(b) Earn Interest?
457(b) plans are investment accounts, so they grow through the earnings on the investments. The rate of return depends on how well the investments perform.
Do You Pay Taxes On a 457(b)?
You don’t pay taxes on the money you contribute to a 457(b). The money grows tax-deferred, which means you don’t pay taxes on the earnings until you withdraw the money.
What is a 457(b) IRA Rollover?
A 457(b) IRA rollover is when you move the money from your 457(b) into an Individual Retirement Account (IRA). You can do this if you leave your job or retire.