The 457 plan is a type of nonqualified, tax advantaged deferred-compensation retirement plan that is available for governmental and certain nongovernmental employers in the United States. The employer provides the plan and the employee defers compensation into it on a pretax or after-tax (Roth) basis. For the most part, the plan operates similarly to a 401(k) or 403(b) plan with which most people in the US are familiar. The key difference is that unlike with a 401(k) plan, it has no 10% penalty for withdrawal before the age of 55 (59½ years, 6 months for IRA accounts) (although the withdrawal is subject to ordinary income taxation). These 457 plans (both governmental and nongovernmental) can also allow independent contractors to participate in the plan, where 401(k) and 403(b) plans cannot.
What Makes a 401(k) Plan Different From A Section 457 Plan?
The major differences between a 401(k) plan and a Section 457 plan are as follows:
Section 457 Contribution Limits
The total annual contribution that can be made to your 457 plan in 2020 cannot exceed 100% of your compensation or $57,000 ($56,000 in 2019), whichever is less. The amount of income an employee can elect to defer is $19,500 in 2020 ($19,000 in 2019). The $19,500 dollar limit is applied across all employers during the year.
Catch-Up Provisions
Just like in a 403(b) and 401(k) plan, the same catch-up election allows you to increase these limits if you are at least age 50 and participating in a plan of a governmental employer (but not a private tax exempt organization). The catch-up amount is up to $6,500 in 2020 ($6000 in 2019). In addition, a special catch-up provision applies only to 457 plans.
The 457(b)(k) plans of state and local governments may allow catch-up contributions for participants who are aged 50 or older. Special 457(b) catch-up contributions, if permitted by the plan, allow a participant for 3 years prior to the normal retirement age (as specified in the plan) to contribute the lesser of:
• Twice the annual limit $39,000 in 2020 and $38,000 in 2019, or
• The basic annual limit plus the amount of the basic limit not used in prior years (only allowed if not using age 50 or over catch-up contributions)
This catch-up amount is available only if you were a participant in preceding years, and you did not make the maximum contribution for those years.
This special catch-up rule applies to all eligible 457 plans, not just eligible 457 governmental plans. However, if you are over age 50, you cannot take advantage of both the age 50–catch-up amount and the special Section 457 plan catch-up amount.
If you are eligible to participate in a Section 457 plan, and require more detailed information, contact your benefits department.
Investments are not a deposit or other obligation of, or guaranteed by, the bank, are not FDIC insured, not insured by any federal government agency, and are subject to investment risks, including possible loss of principal.