The 457(b) Plan Guide For Municipal Employees

A clear guide to understanding the 457(b) plan and making informed contribution decisions.

Understanding the Basics of a 457(b) Plan: Key Features and Rules

 

A 457(b) deferred compensation plan is a powerful retirement savings vehicle tailored for governmental employees. It provides an opportunity to supplement existing retirement and pension benefits through pre-tax or after-tax contributions, enabling participants to grow their retirement savings while enjoying tax advantages. Here’s an overview of the basics, including contribution limits, withdrawal rules, and additional plan features.

 

If you’re an employer interested in starting a 457(b) plan or seeking additional support, please reach out to us.

 

If you’re an employee looking to enroll, we’re here to assist you as well.

 

What is a 457(b) Plan?

A 457(b) plan is a voluntary retirement savings plan that allows eligible employees to contribute a portion of their salary toward retirement savings on a pre-tax or Roth (after-tax) basis. Contributions, along with earnings, grow tax-deferred until withdrawn, at which point they are subject to ordinary income tax.

 

Key Benefits:

  • Supplement existing retirement benefits.
  • Flexible investment options.
  • Tax-deferred growth potential.
  • You can change contributions and investments at any time. This could be completed online, depending on your plan documents.

The 457(b) plan offers a unique opportunity to boost your retirement savings while enjoying significant tax advantages. By contributing to a 457(b), you can reduce your taxable income for the year, if contributions are made on a pre-tax basis. In contrast to this, the after-tax option does not provide any immediate tax benefit.

 

This allows your savings to grow tax-deferred until you withdraw them in retirement, potentially lowering your overall tax burden in the years leading up to retirement. Additionally, the 457(b) plan is especially valuable for individuals working in government roles, as it provides flexibility with no early withdrawal penalties if you need to access your funds before retirement—something not typically found in other retirement accounts like a 401(k).

 

Starting to contribute now can set you up for long-term financial success, allowing you to supplement your pension or other retirement benefits. The ability to contribute a significant amount each year, along with potential catch-up provisions as you near retirement age, means you have an excellent opportunity to maximize your savings. Whether you choose traditional pre-tax contributions or Roth after-tax contributions, the 457(b) plan offers flexibility to tailor your strategy to your financial goals. By taking advantage of this plan now, you can help secure a comfortable, financially stable future for yourself.

 

 

Eligibility and Enrollment

To participate in a 457(b) plan, this is an employment restrictive plan. You must meet eligibility requirements defined by their employer. Enrollment is simple and can often be completed online via platforms or a paper form. If you need help or want one-on-one guidance, please reach out.

 

Contribution Limits

Contributions to your 457(b) plan can be made via payroll deductions or by rolling over funds from other eligible retirement accounts.

 

Standard Contributions

The plan allows for significant contributions, but limits are set annually. For the year 2025, the contributions are the following:

  • Normal Contribution Limits: $23,500

Catch-Up Contributions

Employees nearing retirement have opportunities to contribute beyond standard limits:

  • Age 50 and Over Catch-Up: Employees aged 50 or older can make additional contributions (e.g., $7,500 in 2025). For a total amount of $31,000.
  • Age 60-63: $34,750. This is the year in which you turn 60 and ends in the year that you turn 64.
  • Special 457(b) catch-up provision allows employees within three years of their normal retirement age to contribute more than the standard annual limit. This provision is unique to 457(b) plans and can significantly boost retirement savings during the final years of employment. The catch-up allows participants to contribute the greater of:
    • Double the standard contribution limit for that year, or
    • The unused contribution room from the prior years—essentially letting you catch up on contributions you didn’t make in previous years (up to the three-year limit).

Note: Participants cannot utilize both catch-up provisions simultaneously in the same year.

 

Roth Contributions

Roth contributions are made with after-tax dollars, allowing for tax-free withdrawals during retirement if a qualified withdrawal* is met.  The dollar amount contributions This contrasts with pre-tax contributions, which defer taxes until distribution.

Qualified withdrawal*:

  • Age 59½: You must be at least 59½ years old when you withdraw the funds.
  • Five-Year Rule: The Roth account must be open for at least five years before any qualified withdrawals can be made. The five-year period starts on the first day of the year in which you make your first Roth contribution.

 

Investment Options

Participants can choose from a variety of core investment options, as detailed in the plan’s fund sheets. Additionally:

  • Core investment options include bond funds, mutual funds, asset-allocation funds, and a general account. These options feature different fund styles—value, growth, and blend—each with distinct objectives.
  • A Self-Directed Brokerage (SDB) Account: This is available only in certain plans. It’s important to double-check your plan documents. This offers expanded investment choices, suitable for experienced investors.
  • Information on investment options and performance is accessible 24/7 through online tools or a toll-free voice response system.
  • If you’re looking for more assistance or information on investment options in the plan, please contact one of our local advisors.

 

Transfers and Rollovers

457(b) plans allow participants to transfer funds between investment options and roll over balances from eligible retirement accounts, such as other 457(b) plans, 401(k)s, 403(b)s, or IRAs.

 

You can roll over your 457(b) balance to another 457(b) plan, a 401(k), 403(b), or IRA without triggering penalties or taxes at the time of the rollover.

 

However, if you roll over funds from a 457(b) plan into another retirement account be mindful of the early withdrawal penalty. For 457(b) plans, there’s no penalty for early withdrawals before age 59½. But once rolled over into a 401(k), IRA, or even another 457(b) the IRS early withdrawal penalty (10%) may apply if you withdraw funds before reaching age 59½, even if you’re no longer employed.

 

Withdrawal Rules

Participants can withdraw funds under the following conditions:

  • Retirement
  • Permanent Disability
  • Unforeseeable Emergency (defined by the Internal Revenue Code)
  • Severance of Employment
  • Attainment of Age 59½
  • Death (benefits are distributed to beneficiaries)

In the 457(b) plan, there are no early withdrawal penalties.

 

The 457(b) deferred compensation plan offers tax deferral on contributions and earnings, meaning transactions within the plan do not trigger taxes. Distributions are taxed as ordinary income, and early withdrawals from non-457(b) sources may be subject to additional penalties. Roth contributions follow distinct tax and withdrawal rules.

 

Tip for New York State residents. In 2025, the first $20,000 you withdrawal annually is state tax exempt over the age of 59 ½.

 

Fees

Plan Fees (refer to your plan documents)

  • Recordkeeping or Administrative Fees: This is different for every plan and it’s important to be aware of.
  • Investment Fees: Vary by option and cover expenses like security trading and management. On the investment lineup sheet, each funds fees are listed.

Loans

Depending on your plan, you may have a loan function available to you. If so, participants may borrow against their account balance:

  • Up to 50% of the vested balance or $50,000, whichever is less.
  • Terms: 60 months for general loans or up to 180 months for primary residence loans.
  • Sometimes a small loan origination fee applies.

 

Practical Example:

If you would like to contribute $100 per pay period, depending if you select pre-tax or Roth it has different tax implications.

  • Pre-tax Contributions: Let’s say you contribute $100 to your 457(b) plan. With pre-tax contributions, you might only notice an $80 change in your paycheck today. That’s because you get an immediate tax break—reducing your taxable income right now. When the time comes to take the money out (like when you retire or separate from service), you’ll pay taxes on it at your ordinary income tax rate. This option can give you more money today while still helping you build wealth for tomorrow.
  • Roth Contributions: On the flip side, if you contribute $100 to your Roth 457(b), you’ll see the full $100 impact your paycheck. This means you’re choosing to pay taxes now, rather than later, so you can enjoy tax-free growth in the future. Once you reach age 59½ and have held the Roth account for at least five years, any qualified withdrawals you make will be completely tax-free. Not only will you avoid taxes on your earnings, but it won’t affect your current tax bracket either, giving you more flexibility as you plan for a tax-efficient retirement.

Depending on your plan, you could contribute to both, which allows withdrawal flexibility in retirement. This is especially important for municipal employees because early retirement is common. Contributing to just pre-tax or just Roth will limit the options you have in retirement. For example, if you contribute only to Roth, you will have to wait until age 59.5 to take a withdrawal. If you retire at 50, this may leave you exposed. 

 

Summary

The 457(b) plan offers flexibility and robust tax advantages for governmental employees aiming to secure a comfortable retirement. With options to make pre-tax or Roth contributions, leverage catch-up provisions, and choose from a wide array of investments, this plan is a cornerstone for long-term financial planning. Remember that pre-tax is employment restrictive. While Roth is age restrictive

 

For detailed information about your specific plan, including annual contribution limits, investment options, and withdrawal procedures, refer to your plan documents or contact your plan administrator.

 

By maximizing contributions and understanding the plan’s features, participants can take significant steps toward achieving their retirement goals.

 

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