A 457 plan is a valuable retirement savings tool available to employees of certain governmental and nonprofit organizations. Here's what you need to know when considering a 457 plan:
1. Tax Advantages: One of the primary benefits of a 457 plan is its tax-deferred growth potential. Contributions to the plan are made on a pre-tax basis, meaning they are deducted from your paycheck before taxes are applied. This can lower your taxable income and allow your investments to grow tax-deferred until withdrawal during retirement.
2. Contribution Limits: Like other retirement accounts, 457 plans have contribution limits set by the IRS. As of 2022, employees can contribute up to $20,500 per year to their 457 plan. For those age 50 and older, there is a catch-up contribution allowance, allowing an additional $6,500 contribution annually.
3. Investment Options: Most 457 plans offer a variety of investment options, including mutual funds, index funds, and target-date funds. It's essential to review the available investment choices and select options that align with your risk tolerance, investment goals, and time horizon.
4. Withdrawal Rules: While contributions to a 457 plan are tax-deferred, withdrawals during retirement are subject to ordinary income tax. However, one advantage of 457 plans is their unique withdrawal flexibility. Participants can begin withdrawing funds penalty-free upon separation from service, regardless of age, although withdrawals are still subject to income tax.
5. Employer Matching and Vesting: Some employers offer matching contributions to their employees' 457 plans, providing an additional incentive to participate. It's essential to understand your employer's matching policy and any vesting requirements associated with employer contributions.
In conclusion, a 457 plan can be an excellent option for building retirement savings, especially for employees of governmental and nonprofit organizations. With its tax advantages, contribution limits, investment options, withdrawal flexibility, and potential employer contributions, a 457 plan offers a valuable opportunity to secure your financial future. Be sure to consult with a financial advisor to determine if a 457 plan is the right choice for your retirement savings strategy.