A 457(b) plan is a type of retirement savings account available to certain governmental and non-profit employers in the United States. It is essentially a deferred compensation plan, meaning that employees can choose to have a portion of their salary withheld and deposited into the account, where it will grow tax-deferred until they withdraw it in retirement.

One of the key benefits of a 457(b) plan is that contributions are not subject to federal income tax, which can help employees lower their taxable income and potentially reduce their tax bill. Additionally, withdrawals from a 457(b) plan are taxed as ordinary income, but if taken after age 59 ½, they are not subject to the 10% early withdrawal penalty that typically applies to retirement account withdrawals taken before that age.

To participate in a 457(b) plan, employees must be eligible based on their employer’s offerings and meet any other plan-specific requirements. They can then choose to have a certain percentage of their salary withheld and contributed to the plan, up to the annual limit set by the IRS. For 2021, the contribution limit for a 457(b) plan is $19,500, with an additional catch-up contribution of $6,500 available for employees age 50 and older.

Employees can typically choose how their contributions are invested within the plan, with options ranging from conservative investments like bonds to more aggressive options like stocks. It’s important for employees to consider their risk tolerance, time horizon, and financial goals when selecting investments for their 457(b) plan.

When employees are ready to withdraw funds from their 457(b) account, they can typically choose from a variety of distribution options, including lump-sum withdrawals, periodic payments, or annuitization. It’s important to note that withdrawals from a 457(b) plan are subject to required minimum distributions (RMDs) starting at age 72, similar to other retirement accounts like 401(k)s and IRAs.

Overall, a 457(b) plan can be a valuable tool for employees looking to save for retirement while reducing their tax burden. By taking advantage of this type of deferred compensation plan, employees can benefit from tax advantages, potential employer contributions, and investment growth over time. It’s essential for employees to understand how a 457(b) plan works and to carefully consider their investment options and retirement goals when participating in the plan.

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