What is a 457(b) Plan?
If you are an employee of the State of California, your employer offers a tax-exempt savings benefit known as a government 457(b) deferred compensation plan. The 457(b) deferred compensation plan allows pre-tax and after-tax Roth contributions. Pre-tax contributions are made prior to most taxes being withheld and with any earnings are taxed when they are withdrawn. Roth contributions are made after taxes are withheld and with any earnings will not be taxed again if certain criteria are met.
These plans accept payroll-deducted contributions for participant-directed investing and are intended to help public employees like you meet long-term objectives, such as generating retirement income. Check out this article for answers to some frequently asked questions about deferred comp plans.
How do 457(b) plans work?
As a 457(b) plan participant, you contribute salary deductions – or "deferrals" – which are placed in a participant-directed account. Contributions are limited to an annual maximum dollar amount, as established under the Internal Revenue Code (IRC).
Your contributions are invested based upon your direction from the Savings Plus options. Investing involves market risk, including possible loss of principal. As you get started in the plan, we'll help you understand market risk and strategies.
Learn more about the steps to participating in a deferred comp plan.
Why should you participate in a 457(b) plan?
Some of the advantages of participating in a 457(b) plan may include:
- Your contributions and any earnings to a 457(b) plan are tax-deferred
- Your money has the chance to potentially grow with the power of time and compounding
- You may be eligible to take a tax credit (Saver’s Credit) for elective deferrals contributed to your account
- You may take an unforeseeable emergency withdrawal, as long as certain qualifications are met
- You may become eligible for a participant loan
- Your account is held in trust for the exclusive benefit of you or your beneficiaries.
Can a 457(b) plan include designated Roth accounts?
Savings Plus allows you to designate your deferrals as Roth contributions and convert pre-tax amounts to Roth amounts through an in-plan Roth rollover. Distributions from the Roth account may be tax-free if certain criteria are met. A Retirement Specialist can explain the criteria you must meet for tax free withdrawals.
Can I participate in both a 457(b) and 401(k) plan?
You may enroll in both, however administrative fees will apply in both plans. You should evaluate which plan(s) are right for you.
457(b) Plans and 401(k) plans have some aspects in common. For instance, both plans allow for pre-tax contributions, Roth contributions, and rollover contributions from prior employer plans. Both plans limit withdrawals to qualifying circumstances. Both plans allow for age-based deferrals (age 50 or older).
What are the differences between 457(b) and 401(k) plans?
The key differences between the 457(b) Plan and 401(k) Plan are as follows:
- If you plan to separate from service or retire before age 55 and begin withdrawals before age 59½, an additional 10% early withdrawal tax may apply to the 401(k). In addition, any amounts which are withdrawn that have been rolled over to the 457(b) plan from a qualified plan or IRA.
- Another difference is that you can withdraw funds from a 401(k) for hardship purposes, which may include but not limited to the purchase of your principal residence and college tuition expenses. The 457(b) plan will allow for an unforeseen emergency withdrawal.
- The 457 plan contains a “Traditional catch-up” contribution which may allow you to contribute a higher amount to make up for the years you were eligible to contribute to the 457(b) plan, but did not maximize your contribution for those years. The 401(k) does not contain this provision.