What is 457 Plan

A 457 plan is a non-qualified, tax benefits retirement contributions account sponsored by the employers in local and state government organizations and nonprofit making organization for their employees. Eligible employees are allowed to contribute their salaries, make deposits of pre-tax money while the money accumulates until withdrawal.

How Does A 457 Plan Works?

457 plan method of operation is very similar to that of 401(k). However, 457 does not apply to employees at profit-making organizations. Rather it is basically for employees at local and state government organizations and also for non-profit organizations like charities.

Employees who are eligible for a 457 plan set aside a stipulated amount from their retirement contribution. The fund is then transferred into a retirement account where they continue to grow without attracting any tax.

Types Of 457 Plan

There are two broad types of 457 plan

• 457(b)

• 457(f)

Anong the two types of 457 plans, 457(b) is the most common. It is usually adopted by local and state government employees, while 357(f) is adopted by non-governmental organizations.

Note that employee is allowed to contribute all their monthly salary provided it is not more than the already maximum contributions for a year. Any additional earning or interest is not subjected to tax until the period of withdrawal.

Method Of Contribution Into A 457 Plan

Like the 401(k) and 403(b) plans, the maximum amount that can be contributed to a 457 plan account in a year is $19,500. However, workers are often permitted to pay more in some cases. For instance, if the account has catch-up contributions permit, employees who are above the age of 50 can pay an additional $6,500 to the account. This would be $19,500+6,500 =$26,000

in a year

457 permits what is known as "double limits catch-up." This is a situation whereby employees who are close to their retirement age are allowed to pay twice the stipulated amount in order to make up for the years they have not been contributing to their retirement. The employee can pay up to $39,000.

Generally, an employee's contribution to the account is deducted from his or her paycheck, consequently leading to a reduced income tax.