What is a 457(b) Plan?

Published by Thomas Herold in Investments, Laws & Regulations, Retirement

'457(b) Plan' is explained in detail and with examples in the Retirement edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

A 457(b) plan is a retirement savings vehicle. It derives its name from the Internal Revenue Service code that regulates the plans in its section 457(b). Many times this retirement account name is simply shortened to 457 Plan.

There are many similarities between these 457 Plans and tax deferred, employer provided retirement vehicles including 403(b) and 401(k) plans. All of these retirement vehicles are defined contribution plans. People who participate in these 457 Plans set up payroll deductions so that a portion of their income is put into this investment account that is tax free.

The government established these 457 Plans in 1978. They were set up to be another defined contribution account that would help two particular kinds of employers. They are intended for both government employers and non government employers which are tax exempt as with hospitals and charities.

Despite this fact, a few different rules apply for the government plans as opposed to the non government plans. The principle difference revolves around funding. Government 457 Plans have to be funded by the employer in question. The non government 457 Plans are practically all funded by employees. The vast majority of 457(b) plans that private not for profit companies use they only offer to well paid employees usually in upper level management.

With 457 Plans, there must be both a plan administrator and a plan provider. Each plan provides its own limited choices for investment options which are particular to the plan.

Rollover rules are different for these 457 Plans as well. The non government versions can not be transferred over to qualified retirement plans which include IRA and 401(k)s. Instead they can only be rolled over to other tax exempt 457 Plans. The rules are different with government sponsored employer plans. These may be transferred into another employer’s 401(k), 403(b), or 457(b) plan as well as to an IRA account. The new plan must permit account holders to make such transfers.

Withdrawals are easier for government sponsored plans as well. Individuals may do early withdrawals before they reach the 59 ½ year old age of retirement and not have to suffer the 10% early withdrawal penalty. The full withdrawn amount would be taxed as regular income. Employees who are switching jobs may also keep the money where it is assuming the plan permits this.

Rollover rules on 457(b) plans are pretty standard. If funds are dispersed to the account owner, he or she has a maximum of 60 days to finish the rollover process. Beyond this time, the IRS considers this money to have been distributed and to be taxable. Owners are also restricted to doing a single rollover in a calendar year with these retirement vehicles.

The date on which the owners receive their 457 Plan distribution is when the one year rule commences. While the money is in the 60 day process of being rolled over, it may not be invested. Direct rollovers avoid the dangers of the 60 day rule. An account holder never obtains a distribution check (as with indirect rollovers) in this type of transfer. Instead, the plan provider will directly transfer all money to the new IRA or retirement plan.

Investment choices in 457 Plans are more limited than with Self Directed IRAs or Solo 401(k) plans. The plan provider will restrict choices to ones that fit their plan. If they permit them, owners may invest their funds in individual bonds and stocks, fixed or indexed annuities, exchange traded funds, and mutual funds.

Gold bullion can not be purchased by these plans. Paper gold investments such as stocks of gold mining firms, mutual funds containing gold mining companies, or gold ETFs like GLD and mining ETFs may be purchased instead.

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The term '457(b) Plan' is included in the Retirement edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.