Many employees of state and local governments are enrolled in 457(b) retirement plans. A 457(b) plan has similarities to a 401(k), but there are significant differences in regard to annual contribution limits. The annual contribution limit for some older participants in a 457(b) plan can be as much as twice that of their younger coworkers.
Retirement plans operated in accordance with section 457(b) of the Internal Revenue Code are available to employees of a state or a political subdivision of a state. As with a 401(k), an employee's taxable income is reduced by their portion of contributions to a 457(b) plan. Subsequent earnings on the account balance are also tax-deferred. Distributions from a 457(b) plan are taxed when you eventually take withdrawals.
General contribution limits
As with a 401(k), an employee may contribute up to $18,000 annually to a 457(b) plan. However, there is a difference between the two plan types in the total amount that can go into an account each year. An employer can add additional amounts to an employee's 401(k), and the overall contribution to the account can be up to $53,000. The overall contribution limit for a 457(b) plan is generally $18,000, regardless of whether it is contributed by the employee, the employer, or a combination of both.
Contribution limits at age 50 or over
Both 401(k) and 457(b) plans have provisions that allow employees age 50 or over at the end of the tax year to contribute an additional $6,000. The overall annual contribution limit for an employee age 50 or over in a 457(b) plan is generally $24,000, regardless of whether contributions are from the employer, the employee, or a combination of both. Employees in a 457(b) plan are not necessarily at a disadvantage to 401(k) participants since many government workers also have traditional pension plans.
Alternative contribution limits when near retirement
A unique aspect of a 457(b) plan is that in the three years prior to reaching retirement age, you can utilize unused contribution limits from earlier years. The alternative contribution calculation for those three years does not take into account any additional amount for being age 50 or over. The contribution limit for those three years is the lesser of the following two amounts.
Although the annual limits are the same, some 457(b) plans allow you to make designated Roth contributions on a post-tax basis. Contact an accountant or tax preparation company, like Hough & Co CPA, for more information on the tax advantages of a 457(b) retirement plan.Share
27 October 2016
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