HR Glossary
457(b) Retirement Plan

457(b) Retirement Plan

What is a 457(b) Retirement Plan?

A retirement plan available to government employees and certain non-profit employees. Contributions are made on a pre-tax basis, and the funds grow tax-deferred. Unlike other plans, there is no early withdrawal penalty.

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What is a 457(b) Retirement Plan?

A 457(b) plan is a deferred compensation retirement plan available to state and local government employees and certain non-governmental, tax-exempt organizations. It allows employees to save for retirement by deferring compensation on a pre-tax basis.

Features of 457(b) Plans

457(b) plans have several key features:

  • Pre-Tax Contributions: Contributions are made on a pre-tax basis, reducing taxable income and deferring taxes until withdrawal.
  • No Early Withdrawal Penalty: Unlike other retirement plans, 457(b) plans do not impose a 10% penalty for withdrawals before age 59 ½.
  • Catch-Up Contributions: Employees nearing retirement can make additional catch-up contributions to boost their savings.
  • Flexible Investment Options: Employees can choose from a variety of investment options, including mutual funds and annuities.

Benefits of 457(b) Plans

457(b) plans offer several benefits to employees:

  • Retirement Savings: Provides a structured way to save for retirement with potential tax benefits.
  • Tax Advantages: Contributions reduce taxable income, and investment gains grow tax-deferred until withdrawal.
  • Flexibility: Offers a range of investment options and no early withdrawal penalties, providing greater flexibility.
  • Catch-Up Contributions: Allows employees nearing retirement to make additional contributions, enhancing their retirement savings.

Managing a 457(b) Plan

To manage a 457(b) plan effectively, employees should:

  • Review Plan Details: Understand the plan's contribution structure, investment options, and any employer matching contributions.
  • Monitor Investments: Regularly review and adjust investment choices based on financial goals and market conditions.
  • Maximize Contributions: Take full advantage of contribution limits and catch-up contributions if eligible.
  • Plan for Retirement: Estimate retirement needs and ensure contributions and investments align with long-term goals.

Maximizing Retirement Savings with a 457(b) Plan

Understanding the features and benefits of a 457(b) plan helps employees make informed decisions to maximize their retirement savings. Regularly reviewing contributions and investment choices ensures alignment with long-term financial goals and a secure retirement.

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