If you work for a state or local government, public school, or a 501(c)(3) nonprofit hospital, you may be eligible to contribute to a 457 retirement plan.
Whether you should contribute to such an account depends on a number of factors.
First, a 457 plan is a retirement savings vehicle that is very similar to a 401k or 403b. For governmental plans, contributions can likely be made to a pretax (tax deduction today, taxable distributions) 457 or Roth (no tax deduction today, tax-free distributions) 457 plan.
One of the main benefits of contributing to your 457 plan is that your deferrals have no coordination with the 402(g) limits subject to your 401k/403b, meaning you can do both in the same year.
For example, you could contribute the maximum salary deferral to your 401k/403b ($20,500 for 2022 if under age 50) and also contribute $20,500 to your 457 plan in the same year. A person over the age of 50 with access to a governmental 457 could, in theory, contribute $27,000 to his/her Roth 401k and also contribute to a Roth 457 plan in the same year. This amount of Roth retirement savings could make a huge impact on your financial independence planning and could ultimately be extra savings needed to achieve your financial goals.
Another advantage to a 457 plan is that, unlike a 401k or 403b, there is no 10% penalty for early withdrawals before 59.5. Early distributions are still subject to ordinary income tax, but there is more flexibility if you require an early distribution than a typical retirement plan would offer.
However, unlike a 401k/403b, employer matching contributions to a 457 plan count towards the total contribution limit. For example, if you contributed $10,000 to your Roth 457 plan, then your employer match is limited to $10,500 (to satisfy the annual limit of $20,500 for 2022). In your 401k, you can contribute the full $20,500 salary deferral and receive any employer match on top of that, as the 415(c) limit allows for up to $61,000 per year of contributions (salary deferral + employer match + after-tax contributions) inside of your 401k or 403b.
Perhaps the biggest drawback to a 457 plan is that it is coded as a deferred compensation plan, meaning it is not “your money” the way money held in a 401k, or 403b plan is. Money inside of a typical retirement plan or IRA is not subject to solvency issues with your employer. If your employer goes bankrupt, any funds inside of a 401k/403b are protected, but funds inside of a 457 plan are subject to creditors and would be paid out to clear any outstanding issues. In theory, your 457 balance could be completely liquidated and sacrificed to solve a bankruptcy issue.
Does a 457 plan make sense for you?
If you are young and it is not a governmental plan, we tend to find there are more efficient ways to save for financial independence.
But if you work for a financially strong and stable institution, have a short runway for financial independence, and want to accelerate retirement savings, then a 457 plan (particularly maxing out your Roth 457 with catch-up contributions) could make sense.
If you have a long runway towards financial independence and are deciding between contributing to your 401k/403b and your 457, then it would generally be advantageous to max out your 401k/403b before any contributions are made to a 457.
Before making any contributions to a 457 plan, it is worth the time to consult with a financial advisor to discuss all implications and how they impact your personal financial plan.
Equilibrium Wealth Advisors is a registered investment advisor. The contents of this article are for educational purposes only and do not represent investment advice.
Stock markets are volatile, and the prices of equity securities fluctuate based on changes in a company’s financial condition and overall market and economic conditions. Although common stocks have historically generated higher average total returns than fixed-income securities over the long-term, common stocks also have experienced significantly more volatility in those returns and, in certain periods, have significantly underperformed relative to fixed-income securities. An adverse event, such as an unfavorable earnings report, may depress the value of a particular common stock held by the Fund. A common stock may also decline due to factors which affect a particular industry or industries, such as labor shortages or increased production costs and competitive conditions within an industry. For dividend-paying stocks, dividends are not guaranteed and may decrease without notice.
Past performance is no guarantee of future results. The change in investment value reflects the appreciation or depreciation due to price changes, plus any distributions and income earned during the report period, less any transaction costs, sales charges, or fees. Gain/loss and holding period information may not reflect adjustments required for tax reporting purposes. You should verify such information when calculating reportable gain or loss.
This content has been prepared for general information purposes only and is intended to provide a summary of the subject matter covered. It does not purport to be comprehensive or to give advice. The views expressed are the views of the writer at the time of issue and may change over time. This is not an offer document, and does not constitute an offer, invitation, investment advice or inducement to distribute or purchase securities, shares, units or other interests or to enter into an investment agreement. No person should rely on the content and/or act on the basis of any matter contained in this document. The tax and estate planning information provided is general in nature. It is provided for informational purposes only and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
In just 15 minutes we can get to know your situation, then connect you with an advisor committed to helping you pursue true wealth.
Add me to the weekly newsletter to say informed of current events that could impact my investment portfolio.
Securities and advisory services offered through EWA LLC dba Equilibrium Wealth Advisors (a SEC Registered Investment Advisor).
* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.
* Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.
* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.
* All indexes referenced are unmanaged. The volatility of indexes could be materially different from that of a client’s portfolio. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. You cannot invest directly in an index.
* The Dow Jones Global ex-U.S. Index covers approximately 95% of the market capitalization of the 45 developed and emerging countries included in the Index.
* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
* Gold represents the afternoon gold price as reported by the London Bullion Market Association. The gold price is set twice daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy ounce.
* The Bloomberg Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
* The Dow Jones Industrial Average (DJIA), commonly known as “The Dow,” is an index representing 30 stock of companies maintained and reviewed by the editors of The Wall Street Journal.
* The NASDAQ Composite is an unmanaged index of securities traded on the NASDAQ system.
* International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
* The risk of loss in trading commodities and futures can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. The high degree of leverage is often obtainable in commodity trading and can work against you as well as for you. The use of leverage can lead to large losses as well as gains.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
* Past performance does not guarantee future results. Investing involves risk, including loss of principal.
* The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee it is accurate or complete.
* There is no guarantee a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
* Asset allocation does not ensure a profit or protect against a loss.
* Consult your financial professional before making any investment decision.
In 15 minutes we can get to know you – your situation, goals and needs – then connect you with an advisor committed to helping you pursue true wealth.