Understanding 457 Plans: A Comprehensive Overview
The Internal Revenue Code (IRC) introduces two distinctive 457 plans catering to specific segments of the workforce. Firstly, the 457(f) plan is tailored for top executives in non-profit organizations (NPOs), while the 457(b) plan is extended to state and local government employees.
In essence, 457 plans function analogously to popular retirement vehicles such as the 401(k) or 403(b) plans, rendering them accessible to both governmental and select non-governmental employers across the United States.
The key divergence between 457 plans and their 401(k) counterparts lies in the withdrawal penalties. Unlike 401(k) or 403(b) plans, 457 plans impose no penalties for withdrawals made before the age of 55 or 59½, the standard thresholds for Individual Retirement Account (IRA) accounts. Notably, both 457(b) and 457(f) plans uniquely open their doors to independent contractors, setting them apart from 401(k) and 403(b) plans.
Whether one opts for the 457(b) or 457(f) variant, these plans emerge as optimal retirement savings solutions, particularly for individuals employed by state or local governments or affiliated with certain NPOs, such as churches.
Initiated by the employer, these plans allow employees to contribute on a pre-tax or post-tax (Roth) basis. Post-retirement, individuals can choose to withdraw funds, maintain the existing balance, transfer assets to another 457, 403(b), or 401(k) with a new employer, or seamlessly roll them into an Individual Retirement Account (IRA). This flexibility adds another layer of strategic financial planning to ensure a secure and customized retirement journey.
