457 Plan
A 457 plan is a deferred and non-qualified compensation plan. These plans are established by state and local governments, tax-exempt local governments, and employers who are tax-exempt. Employees who are eligible can make contributions to these plans, which are tax-deferred, so that all contributions will not be taxed until the assets are distributed at retirement.
What are the basic features of a 457 plan?
Although a 457 plan is often considered to be similar to a 401(k) plan in many aspects, it differs in the fact that employer-matched contributions are not made. These plans are also not considered to be qualified retirement plans by the IRS. Qualified employees participating in these plans can contribute a portion of their annual income to these plans, up to a defined annual limit. The money contributed to a 457 plan will not be taxed until it is withdrawn at retirement age. Distribution of the money contributed to these plans can also be taken in certain emergency situations, or when a person changes jobs. At the point of distribution, regular income taxes must be paid, and the money cannot then be transferred into an IRA or other plan. Distributions can be taken in annual installments, as a lump sum, or in the form of an annuity.
Who can participate in a 457 plan?
These plans are designed for state and local government agencies that are exempt from paying federal income taxes. They are also used by other non-church related organizations, as long as they are exempt from federal income taxes. These can include charitable organizations and foundations, educational organizations, labor unions and trade associations, and hospitals. There are two different types of 457 plans, one designed for government agencies and one designed for organizations that are non-government, but which are still tax-exempt.
What is a 457(b) plan?
When these plans are designed for non-government organizations, they are established under Section 457(b). These non-government plans are limited to employees within the organization who are highly compensated, which usually means only the officers or directors or the organization. Because these plans are usually reserved only for the executives or others who are highly compensated, they are sometimes termed as a “top hat” plan. These plans can be useful to defer federal and state income tax payments during the person’s peak years of financial earning, so that the taxes can then be paid at a point in the person’s life where their earnings are much lower. As compared to a 457 plan designed for government employees, these non-government plans are more restrictive. Money that is deferred into a 457(b) plan can be rolled over into another non-government 457 plan, but not into another kind of retirement plan.
What is a 457(f) plans?
457(f) plans are designed so that employers who are tax-exempt can offer additional retirement benefits to employees who are highly compensated. Employees can contribute to these plans on a tax-deferred basis, which can save them a substantial amount of money. However, this money is only paid to the employee when they retire. The money remains the property of the company, which essentially creates a tax shelter for the employee. However, if the employee leaves the company before retirement, they forfeit the money. 457(f) plans are often referred to as “golden handcuff” plans for this reason.