Contributing to 457 Plans

In today’s video we are discussing 457 plans, also known as deferred compensation plans we recommend that you do. This is based upon several factors and Ben is going to walk us through the detailed overview of how the 457 plan works and then some pros and cons that come along with them.

So a 457 plan is really another type of non qualified retirement plan. And really think, think of it like a deferred compensation plan. Some of the pros and cons with 457 plans, really one of the main advantages is that it does not count towards your 402 G limit.

So you could actually contribute 20,500 to a traditional Roth, four hundred and one K, and you can also contribute 20,500 to a 457. So that 457 $20,500 contribution does not count towards your 400 and G limit for any sort of elected deferrals.

So as I mentioned, you can contribute to both A in the same year and a 457 really operates very similar to A. Can contribute either traditional or Roth depending on what the plan document allows. All of the growth is tax deferred, the distributions are taxable and if it’s Roth, all the distributions are going to be tax free.

So some of the main disadvantages and really Matt, why we typically recommend clients don’t use 457 plans. Number one, oftentimes they have limited investment options with high fees within those investment options.

And really the main disadvantage and the main reason we shy away it is technically not your money. Like money inside of an IRA or money inside of A is it is subject to potential bankruptcy or solvency issues from the employer.

That’s a really great point. So if you’re, let’s say in your thirty s and you’re at the same job for 30 years and you’re contributing this 457 plan at any point, if that company goes bankrupt, all of the money inside your 401K is great, it’s yours.

All the money inside your 457 plan is technically wages that haven’t been paid to you. That money goes away in the matter of bankruptcy. So if you leave the job, then you could withdraw the money without penalties.

You’d have a huge tax bill, assuming it’s a pretax 457 plan. But if you’re planning on staying with the employer long term and the financial solvency of that employer is in question, the peace of mind will not be there wondering every day as the account gets bigger and figure is this money going to be there when I need it the most?

And you don’t want to base career decisions based upon a big 457 plan if suddenly the company comes under pressure. The only exception to this is if the 457 plan is a governmental plan, then it wouldn’t have the same bankruptcy issues as a traditional non governmental 457 plan would.

So a governmental 457 plan generally we’re okay with a regular 457 plan. We would recommend, for example, if you very strong backing of the company you work for, and if you’re within five to ten years of retirement when you get extra tax deferrals saved, expecting you to be in a lower tax bracket, enter in retirement.

This is also okay, but also a best practice if you already have a 457 plan. This should be, from a tax perspective, something we want to fill up from the ten to the 24% bracket when you retire. And also just from an Asset Protection 101 standpoint, typically an account that we recommend to utilize early on in retirement to make sure the money is actually there, depending on the company financials that you work for your whole life.

If you have any questions about your specific 457 plan, feel free to reach out. We’re happy to help.