A 457 is a nonqualified, employer-sponsored deferred compensation plan for employees of state and local government agencies and some tax-exempt organizations. Eligible employees are allowed to make salary deferral contributions to the 457 plan. Earnings grow on a tax-deferred basis and contributions are not taxed until the assets are distributed from the plan.
- Eligible employers - A state, political subdivision of a state (such as a city or town), any agency or instrumentality of a state or political subdivision of a state (such as a school district), and any tax-exempt organization except for a church or synagogue or an organization controlled by a church or synagogue.
Types of plans
- Eligible -A plan that includes limits on the employee contributions to the plan. Receives favorable tax treatment.
- Ineligible - A plan providing for greater employee deferral of compensation, generally designed for highly paid executives. Receives no favorable tax treatment.
Contribution limits for eligible plans
- Basic limit - $17,500 (2014).
- 50-or-over catch-up contributions limit - $5,500.
3-year-old catch-up provision -Applies during participant's last three years before plan's normal retirement age. Limited to lesser of:
- $35,000 (twice basic annual limit for 2014) or;
- The basic annual plus underutilized basic annual limit plus underutilized basic annual limit in prior years.
- Not available to those utilizing the 50-or-over catch-up provision.
- Double dipping - Contributions to a 457 plan do not reduce contributions to other types of deferred compensation plans such as 401(k) or 403(b) plans. This would allow an employee under age 50 to contribute $17,500 to a 403(b) and another $17,500 to a 457 plan if both are offered.
- Permitted after severance from employment.
- May permit loans and distributions for unforeseen emergencies or small, inactive accounts.
- No penalty for withdrawal before age 59 1/2.
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