What is a Virginia Retirement Plan 457?
The Virginia Retirement Plan 457 is a tax-deferred retirement savings plan designed for state and local government employees in the state of Virginia. Similar to the popular 401(k) plans, the 457 plan allows employees to contribute a portion of their earnings to a tax-deferred account, which grows tax-free until the funds are withdrawn during retirement. This plan is named after Section 457 of the Internal Revenue Code, which governs these types of plans.
Eligibility and Contributions
To be eligible for the Virginia Retirement Plan 457, an employee must be employed by a participating state or local government entity in Virginia. Employees can contribute a portion of their salary to the plan, with a maximum annual contribution limit set by the IRS. As of 2021, the annual contribution limit for the 457 plan is $19,500, plus an additional $6,500 for those aged 50 or older.
Plan Features and Benefits
The Virginia Retirement Plan 457 offers several features and benefits that make it an attractive retirement savings option for eligible employees:
1. Tax-deferred growth: Contributions to the plan grow tax-deferred, allowing employees to maximize their savings potential.
2. Diversification: The plan offers a variety of investment options, including mutual funds, index funds, and annuities, allowing employees to diversify their portfolios.
3. Employer match: Some employers may offer a matching contribution, which can significantly boost an employee’s savings.
4. Flexibility: Employees can make changes to their contribution amounts, investment options, or even withdraw funds from the plan, subject to certain rules and penalties.
5. Loan options: In certain circumstances, employees may be eligible to borrow against their plan balance, providing a potential source of emergency funds.
Withdrawals and Penalties
Withdrawals from the Virginia Retirement Plan 457 are generally taxed as ordinary income. If an employee withdraws funds before reaching age 59½, they may be subject to a 10% early withdrawal penalty, in addition to ordinary income taxes. However, there are exceptions to this rule, such as for certain hardship withdrawals or distributions due to disability or death.
Transitioning to Retirement
As employees approach retirement, they can transition their 457 plan balance into other retirement accounts, such as an IRA or a rollover 401(k). This can provide flexibility in managing their retirement savings and potentially reduce taxes on withdrawals.
In conclusion, the Virginia Retirement Plan 457 is a valuable tool for state and local government employees in Virginia to save for retirement. By taking advantage of tax-deferred growth, investment options, and potential employer matches, employees can build a strong financial foundation for their golden years.
