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457(b) Basics

Hi. My name is Matt Daley, and welcome back to the Financial Success Academy.

In this episode, we'll discuss the basics of your 457(b) deferred compensation plan and how it differs from other types of retirement plans.

A 457(b) plan is a type of non-qualified retirement savings vehicle that is available for governmental and some non-governmental employers in the United States. It allows you to save and invest portions of your income today to generate income in retirement.

On the DecisionPoint 457(b) platform, participants have the ability to make salary contributions on either a pre-tax or Roth after-tax basis. These dollars go into the account, get invested, and hopefully grow with financial markets over your career.

A unique benefit of a 457(b) plan is the flexibility in taking distributions from that account. In most retirement accounts like a 401(k), IRA, or Roth IRA, you cannot access those funds until age 59 and a half or you'll pay a 10% penalty. That IRS early withdrawal penalty does not apply in a 457(b) plan. Upon separation from service, regardless of age, you're eligible to take penalty-free distributions. There are potential tax implications for taking a distribution but no penalty.

One critical thing to remember is that if you roll your retirement funds out of your 457(b) and into an IRA prior to 59 and a half, you would then be subjecting those dollars to the early withdrawal penalty until you reach that age. This could be a very costly mistake should you need to access those funds before 59 and a half.

Now that you know how taking funds out of your 457(b) works, let's discuss how to get funds into your retirement account.

Each year, the IRS sets a cap or limit on the amount that can be contributed to your retirement plans. For the year 2022, that limit is $20,500 if you're under 50, $27,000 beginning in the year you turn 50 and beyond, and $41,000 if you take advantage of the three-year special catch-up provision unique to 457(b) plans.

Keep in mind, however, that the employer contribution or match counts against that annual limit. For example, if you're under 50 and your employer contributes $500 per month, the most you could contribute in 2022 would be $14,500.

There are lots of unique variables that impact decisions like how you should be invested, how much you need to save, or whether or not you should contribute on a pre-tax or Roth basis.

Please call the office if you ever have questions about your 457(b) account. We are always here as a resource to help you make those decisions.

For more information on the differences between Roth and pre-tax contributions, we hope you'll watch our video where we discuss the differences of the two and some considerations you should think about as you make that decision.

As always, thanks for tuning in to the Financial Success Academy and stay safe.