Understanding your retirement plan is an essential piece of making it work the way you want and retiring the way you dream. Without complete knowledge of your plan, there is an increased chance you won’t save enough or be prepared for expenses. That’s why a 457 retirement plan is so helpful.
Some people will tell you that finances are simple. They will say there is not much to understand. In a way, they are right. If you spend less than you earn, you’re doing a good job. Still, if you ignore the finer details of the more nuanced parts of finance, you can miss out on a lot of money you’ll never know about.
Your retirement plan is one of the most important things to understand because it is the foundation of your savings and future. This is especially relevant for people who have a retirement plan they didn’t expect.
Most people hear about 401(k) plans coming into the working world, but that’s not all that is out there. Depending on where you work, you could have a different kind of retirement plan, maybe one you’ve never heard of, like the 457 retirement plan.
What is a 457 retirement plan?
457 plans are available to state and local government employees like police officers and civil servants. They may also be available to executives at non-profit organizations.
There are two kinds of 457 plans; the 457(b) and the 457(f). These plans can operate independently of each other or work together. With a 457(b), both the participant (or the employee) and the sponsor (employer) can make contributions to the plan. With a 457(f), only the sponsor can make contributions.
The primary advantage of this retirement plan is the same as most other retirement plans. It allows you to make pre-tax contributions to a retirement account that will grow tax-deferred. This will lower your immediate taxable income since the contributions are taken directly from your paycheck, and all growth within your account is also tax-deferred.
How it matches up against other retirement plans
The 457 retirement plan provides one big advantage to other retirement plans. Most retirement plans will require you to pay a 10% penalty if you make a withdrawal before the age of 59 ½ (with a few exceptions). The 457 plan, on the other hand, allows you to make withdrawals before 59 ½ without paying any penalty.
You’ll still need to pay tax on all withdrawals, but having the freedom to access the money in your account without penalty provides many options.
Some plans also come with a Roth option, which is taxed differently. With a Roth, instead of making pre-tax contributions, all of your contributions are made after-tax. This means that withdrawals from the account in the future will be tax-free. This is an advantage to people who anticipate being in a higher tax bracket when making withdrawals.
What kind of retirement plan do you have? Do you know how it works?