457 Plan

457 plan is a retirement project offered by governments or some nonprofit employers. Employees are enabled to make deferred contributions from their salary not subjected to tax. The money on the special account is not being taxed till the withdrawal.

457 Plan explained

The 457 plan is only offered to public sector and nonprofit employees as well as charity executives. Those who work for for-profit organizations most commonly use 401(k) plans. It is similar to the 457 plan.

Workers who participate in the 457 plan donate a certain part of their salary to retirement funds. There money is growing in the amount without being taxed. Normally the 457 plan is classified into two kinds:

457(b): This is the prevailing 457 plan and is suggested to the public sector employees.

457(f): Government and select non-government employees such as executives or those with high salary are usually provided with this plan.

Based on the employee's wish, they can contribute even the whole salary to these funds, but there is a yeal limit that cannot be exceeded. 

Nowadays members of staff are able to contribute up to $20,500 annually to 457 plans. But in some cases this amount can be even higher.

For example, organizations might permit catch-up contributions. In these circumstances, employees over the age of 50 have an ability to contribute $6,500 more.

Sometimes workers can contribute even more. If an employee did not use their ability to contribute to the plan but were eligible to do so, they can contribute up to $41,000 to their 457 plan within the last three years before the retirement age is reached.

Advantages of a 457(b) Plan

As stated above, contributions are made before the salary taxation. That means, if an employee earns $5,000 a month and wants to donate $1,000 to their 457 plan, then the rest $4,000 will be subjected to taxation.

When participating in the 457 plan, workers have also an option to invest their money in selected mutual funds. There the amount of money sent grows with the help of interest rate and is not taxed until the moment of withdrawal.

Nevertheless, the 457 plan has disadvantages. THe main of them is a 10% penalty fee in case of an early withdrawal of saved money.