457 Retirement Plans - What Do You Think Makes Them Different?

457 retirement plans are actually sets of provisions under Tax Code Section 457 that governs all non-qualified compensation plans of governmental and non-church controlled tax-exempt organizations. The purpose is to allow employees to set aside funds for their retirement.

These plans are also known as Section 457 plans.

Only eligible employers can establish 457 retirement plans.

Eligible employers refer to states, subdivisions of states, instrumentalities or political subdivisions of states, or any entity other than a governmental unit that is exempt from federal income taxes.

In many areas, the 457 plans are similar to the 401k plans (retirement plans created specifically for employees in the private sector). In both plans, employees would contribute portions of their paychecks into a retirement account. That money and any earnings that the employees accumulate are not taxed until they withdraw them.

But there are 3 key differences found in a 457 plan, in that it has:

1. No employer match.

2. No minimum retirement age.

3. No 10% federal penalty if you withdraw the funds early (i.e.before the age of 59½), but your withdrawal would subject to ordinary income taxation.

What are the benefits?

They include pretax salary-reduction contributions and tax-deferred growth of the investment earnings.

In terms of distribution, it's done when:

a. You reach the age of 70½.

b. You cease being employed.

c. You encounter unforeseen emergency.

d. You die.

You can roll over the distribution into an IRA (individual retirement account) or any other forms of eligible retirement plans, but it must be under the same rules that apply generally to the rollover to the eligible plans.

In addition, employees who consider Section 457 retirement plans can also rollover their plans into another Section 457 plan without even incurring the income tax placed on the amount rolled over.

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