What is a 457(b) Retirement Account?
A 457(b) retirement account is a type of tax-deferred retirement savings plan that is available to employees of state and local governments, as well as certain tax-exempt organizations. Similar to a 401(k) plan, the primary purpose of a 457(b) account is to provide employees with a means to save for retirement while enjoying tax advantages. Here’s a closer look at what makes a 457(b) account unique and how it can benefit participants.
Understanding the Basics
The 457(b) account was established under Section 457 of the Internal Revenue Code, which is why it is commonly referred to as a 457(b) plan. This type of retirement account allows eligible employees to contribute a portion of their pre-tax income to the account, which means that the money is not subject to federal income tax until it is withdrawn during retirement. This tax deferral can be a significant advantage, as it allows participants to grow their savings faster and potentially reduce their taxable income in the short term.
Contributions and Limits
Contributions to a 457(b) account are made on a pre-tax basis, meaning that the money is deducted from the employee’s salary before taxes are calculated. This allows participants to save more money for retirement than they would be able to with a post-tax investment. Additionally, 457(b) accounts have annual contribution limits, which are subject to change each year. As of 2021, the annual contribution limit for 457(b) accounts is $19,500, with an additional $6,500 catch-up contribution available for participants aged 50 or older.
Investment Options
Similar to other retirement accounts, a 457(b) account offers a variety of investment options, allowing participants to choose how their contributions are allocated. These options may include mutual funds, index funds, annuities, and other investment vehicles. It’s important for participants to carefully consider their investment choices, as they will be responsible for managing their accounts and making adjustments as needed to align with their retirement goals.
Benefits and Withdrawals
One of the key benefits of a 457(b) account is the ability to withdraw funds tax-free during retirement. However, it’s important to note that withdrawals made before age 59½ may be subject to a 10% early withdrawal penalty, in addition to any applicable taxes. Participants should also be aware that the order in which they withdraw funds from their 457(b) account may have tax implications, so it’s advisable to consult with a financial advisor or tax professional when planning their withdrawals.
Transitioning to Retirement
When the time comes to transition to retirement, participants can choose to take a lump-sum distribution, roll over the funds into another retirement account, or receive periodic withdrawals. The decision on how to handle the funds should be based on the individual’s financial situation and retirement goals.
In conclusion, a 457(b) retirement account is a valuable tool for state and local government employees and certain tax-exempt organization employees to save for their retirement. By understanding the basics, such as contributions, limits, investment options, and withdrawal rules, participants can make informed decisions about their retirement savings and enjoy the tax advantages that come with a 457(b) account.
