457 Plan and Bitcoin

What is a 457 plan?

A 457 plan is nonqualified, tax-advantaged deferred-compensation retirement plan that is available for state and local government employers and certain tax-exempt organizations.

For government 457 plans, state or local law determines eligibility. For 457 plans sponsored by tax-exempt organizations, only highly compensated employees and select management may participate.

Under a 457 plan, employees defer income tax on retirement savings into future years.

Though a form of a deferred compensation plan existed for state and local government employers prior to 1978, the Revenue Act of that year officially established 457 plans. 401(k) plans began around the same time for private employers; some government employers used them as well, until further legislation clarified the intent behind the different plans.

The Tax Reform Act of 1986 prohibited the establishment of new 401(k)s for state and local government employers, which helped in reinforcing the 457 as the primary retirement vehicle for state and local government employers. Those government employers with established 401(k) plans were allowed to continue them until they terminated them at a later date. The Economic Growth and Tax Relief Reconciliation Act of 2001 brought 457 plans into closer alignment with other retirement plans with such measures as increasing the contributions that could be made.

While 457 are exempt from rules of the Employee Retirement Income Security Act (ERISA), those rules are often consulted when employers are establishing policies, procedures, and best practices in administering the plans.

Benefits of a 457 plan

If you are employed by the government or a non-profit and are offered a 457 plan, you’ll find that there are several attractive features to this plan.

But as you consider these benefits, remember that choosing a retirement plan now doesn’t mean you’re stuck with it forever. Down the road, you might want to reallocate some or all of your retirement savings into other account types, particularly if you want to diversify your holdings beyond the traditional options of mutual funds, stocks, and bonds.

In fact, you might find that you can enjoy the benefits of choosing a plan—like the 457—now, but then later reallocate your retirement savings so that you can pick up the perks of other account types. This lets you add those other accounts’ benefits to your retirement savings, as is often seen with account types like self-directed IRAs.

The key benefits of a 457 plan include:

• It’s offered. A retirement plan is better than no retirement plan. If your employer offers one, you’ll probably want to take it over nothing, even if it come with limitations. Because 457 plans are offered by specific employer types, you may encounter this as your option if you want your employer to help you save for retirement.
• You can reduce taxable income. Through a participation agreement with your employer, you determine the amount of your 457 contributions up to IRS-defined limits. You can make pre-tax contributions, reducing your taxable income. If your employer is a government agency, you may also be allowed to contribute on a Roth after-tax basis.
• Your earnings grow tax deferred. Your 457 account’s earnings are reinvested and grow tax deferred. If your 457 is sponsored by a government agency, your money is only taxed when it is withdrawn. However, withdrawals from a Roth 457 plan are subject to special rules. If your 457 is sponsored by a tax-exempt organization, withdrawals are taxed when they are paid out or made available.
• You can take your 457 with you. You may be able to roll your 457 account into another employer’s eligible retirement plan, Traditional IRA, or Roth IRA, if your 457 is sponsored by a government agency. You also can leave your money in your plan or cash out. If you choose the cash out option, you will be subject to income tax.
• You can make catch-up contributions. If you are at least 50 years of age and you have a government-sponsored 457 plan, you may make an annual catch-up contribution up to $6,500 as of 2020. However, if you have a 457 plan sponsored by a tax-exempt organization, you can’t make catch-up contributions.
• There is no early withdrawal penalty. Withdrawals from your 457 account are not subject to the 10 percent early distribution penalty. And you can make regular withdrawals from your 457 as soon as you retire, regardless of whether you have reached age 59 and a half or not.