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If you work for a state or local government, you may have an excellent opportunity to set aside money for your retirement by contributing to your employer's 457(b) retirement plan. Certain 501(c)(3) non-profit organizations may also offer a 457(b) plan although different rules apply.
A 457(b) plan (named for the section of the Internal Revenue Service code that authorized these plans) gives you the opportunity to grow your retirement nest egg faster. 457(b) plans offer significant tax advantages on both your contributions and earnings on the investments you make through the plan.
Features of 457(b) plans:
You make contributions to your 457(b) plan from your pre-tax income. As a result, these contributions are excluded from your current federal taxable income. That means you may pay less in federal income taxes and, in most states, state income tax as well.
In addition, you do not pay taxes on your earnings from your investments in your 457(b) plan until you retire or withdraw them. Withdrawals are taxed as ordinary income in the year received. That means your investments have the potential to grow faster.
Depending on the plan, Roth contributions may also be permitted.
High Contribution Levels
The maximum annual contribution you can make in your 457(b) plan is:
|Year||Maximum annual contribution if you are under age 50|
Note: This maximum includes any employer contributions. 457(b) plan participants who are age 50 and older are eligible to set aside additional monies through catch-up contributions:
|Year||Using catch-up contribution provision, maximum annual contribution if you are age 50 or over|
Special 457(b) catch-up contributions, if permitted by the plan, allow a participant for 3 years prior to the normal retirement age (as specified in the plan) to contribute the lesser of:
Because this provision is quite complicated, please consult with your Lincoln Investment financial advisor for details.
Unlike most retirement plans, you will not have to pay a 10 percent penalty if you withdraw money from your 457(b) plan before you reach age 59 1/2. But you will be taxed on the amount you withdraw from the plan. You are required to start making minimum withdrawals when you turn age 72, unless you are still employed.
To maintain the tax deferral of your 457(b) plan assets when you leave your job for another employer or retire, you can roll the assets over to another defined contribution plan, such as a 401(k), 403(b) or IRA. Your 457(b) assets will then become subject to the rules of the new plan.
For example, if you roll over your 457(b) assets into a 401(k) plan and you make withdrawals before you turn age 59 1/2, you will incur the 10 percent early withdrawal penalty that applies to 401(k) plans. Plus you will need to pay taxes on the withdrawn amount.
Before deciding whether to retain assets in an employer plan or roll over to an IRA an investor should consider various factors including, but not limited to, investment options, fees and expenses, services, withdrawal penalties, protection from creditors and legal judgments, required minimum distributions, possession of employer stock and reduction/elimination of guaranteed benefits from the pension plan.