457 Plans

457 retirement plans is a tax exempt salary deferral arraignment established for government agencies. These agencies include local, state, federal, and tax exempt employees. They may also include school districts, county governments, and political organizations. This plan originated from IRS code IRC 403B/457 established in 1982, which outlines the rules governing this particular retirement plan. This retirement plan for government employees has a distinct advantage over other retirement plans and contribution limitations. Most notable is that the current contribution limit to the 457 plan is $13,000 or 100% of compensation which ever is less. In addition to these limits the 457 plans allows participants to be concurrently enrolled in a 401K if they hold other employment outside of the government agency. If this is the situation an employee has the ability to contribute not only the maximum $13,000 to the 457, but may also contribute an additional $13,000 to a 401K retirement plan. This is unique to the 457 plan, and does not apply to other retirement accounts. Normally there is a maximum aggregate contribution limit that cannot be exceeded by an employee if they are eligible to participate in multiple retirement programs in the same year.

Once an employee separates service from a qualified agency they have the option to rollover the funds that have accumulated in their 457 retirement plan. This is may be done by people who prefer to consolidate retirement accounts or possibly would like to change investment vehicles. The funds maybe rolled over into a IRA, another 401K, or a 403B retirement plan. If done so it is a tax reportable event, but the distribution is not taxed if invested into another qualified retirement plan within 60 days. If an employee does leave one agency and chooses to return to another government agency that offers a 457 plan they may transfer the funds from one plan to another. If this is done it is not a reportable event and the participant does not need to file any additional paperwork with the IRS.

457 plans are similar to 401K plans as they do allow an employee to take out a loan against the capital that is in their account. The IRS has placed limitations on the fiancial institution who chooses to participate in these transactions. These limitations normally refer to the intrest rate which may be charged to the participant. In addition the load is subject to taxes and penalties if the balance is not paid back in a timely manner or if the employee terminates employment while there is an outstanding balance. The tax rate is dependant upon the annual income, and the standard penalty is 10%. This penalty is applied any time a participant takes a distribution from a 457 plan prior to age 59 ½. Not only is there a penalty applied to these distributions, but the government also places limitations on allowable distributions. The only acceptable distributions allowed on 457 plans are retirement, separation from service, and unforeseeable emergencies such as health related problems or to prevent a foreclosure on a primary residence.