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How a 457(b) Plan Works After Retirement

A senior couple researching rules for 457(b) distributions in retirement.

Government employees, or those of a charity or religious organization, might have the opportunity to invest in a retirement account called a 457(b) account. These are tax-advantaged accounts that can help you effectively save for retirement, but they are subject to rules and laws that you must comply with to keep the tax-advantaged status. Additionally, these accounts have specific requirements post-retirement, such as being subject to required minimum distributions (RMDs). A financial advisor can help you determine what you need to do with your retirement accounts or how to build wealth for your retirement goals.

What Is a 457(b) Plan?

A 457(b) plan is a type of retirement savings plan available to certain employees of state and local governments, as well as certain tax-exempt organizations such as charities and religious organizations. It’s named after Section 457(b) of the Internal Revenue Code, which governs these plans.

Here are five key features of a 457(b) plan to keep in mind:

  • Employee contributions: Employees can contribute a portion of their salary to the plan on a pre-tax basis, meaning contributions are deducted from their paycheck before income taxes are applied. Some plans may also offer Roth 457(b) options, where contributions are made with after-tax dollars, but qualified withdrawals in retirement are tax-free.
  • Employer contributions (if offered): Some employers may choose to contribute to their employees’ 457(b) plans, either through matching contributions or other forms of employer contributions.
  • Tax deferral: Contributions to a traditional 457(b) plan grow tax-deferred, meaning that investment earnings are not taxed until withdrawn. This can potentially allow for greater accumulation of savings over time when compared with taxable accounts.
  • Withdrawal rules: Withdrawals from a 457(b) plan are generally subject to income tax. However, if withdrawals are made after retirement or separation from service, they may be eligible for favorable tax treatment. Additionally, unlike many other retirement plans, there is no early withdrawal penalty for withdrawals before age 59 ½, although they will still be subject to income tax.
  • Limits and eligibility: The maximum amount an employee can contribute to a 457(b) plan is determined by the IRS and may be subject to change each year. Employees who are eligible for both a 457(b) plan and another type of employer-sponsored retirement plan, such as a 401(k) or 403(b), can contribute to both and effectively double their contribution limits.
  • Distribution options: Upon retirement or separation from service, participants can generally choose from various distribution options, including lump-sum payments, periodic payments, or annuities.

It’s important for individuals considering a 457(b) plan to review the specific details and features of their employer’s plan, as these can vary. Additionally, seeking advice from a financial advisor can help individuals make informed decisions about retirement planning and investment options.

How Much Can You Contribute to a 457(b) Plan?

A 457(b) plan’s annual contributions and other additions to a participant’s account cannot exceed the lesser of 100% of the participant’s compensation, or the elective deferral limit ($23,000 in 2024).

Moreover, participants nearing retirement have the option to double the standard limit under certain conditions, allowing them to potentially catch up if they have not been able to maximize their contributions in previous years.

How a 457(b) Plan Works After Retirement

A retiree deciding on a distribution option for his 457(b) plan.

Once an individual retires, active contributions to their 457(b) plan cease, as they are no longer receiving a salary from the employer that sponsors the plan.

Retirees may decide to take a lump-sum distribution, opt for periodic payments or rolling over the funds to an individual retirement account (IRA) or another eligible retirement plan, while still subject to income tax upon withdrawal.

Some plans may also offer annuitization options, which can provide a steady stream of income payments over a specified period or for life, depending on the terms of the plan.

Here are three common distribution options after retirement:

  • Lump-sum distribution: You can take the entire balance of your 457(b) account as a single payment.
  • Periodic payments: You can choose to receive regular payments from your 457(b) account over a set period of time, such as monthly or annually.
  • Annuity: You can use your 457(b) savings to purchase an annuity, which provides a stream of income for a specified period or for the remainder of your life.

Keep in mind that funds in your 457(b) account are typically subject to requirement minimum distributions (RMDs). Similar to other tax-deferred retirement accounts, like 401(k)s and traditional IRAs, you’re generally required to start taking withdrawals from your 457(b) plan once you reach age 73, unless you’re still working for the employer sponsoring the plan and you’re not a 5% owner.

These are general guidelines, and the specifics of how a 457(b) plan works after retirement can vary based on your plan’s rules and provisions. It’s advisable to consult with a financial advisor or tax professional to understand the implications of your choices and to develop a retirement income strategy tailored to your individual needs and circumstances.

Bottom Line

457(b) participants nearing retirement have the option to double the standard limit under certain conditions.

The 457(b) plan can be a valuable retirement savings vehicle, offering no early withdrawal penalty and special catch-up contributions for public sector and nonprofit employees. As retirement approaches, it’s important to develop a personalized withdrawal strategy that considers tax implications, changing life circumstances and market conditions.

Tips for Retirement Planning

  • A financial advisor can help you make a retirement plan and build wealth to make sure you save enough. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Consider using a retirement calculator to help you see whether you’re saving enough for the retirement you want.

Photo credit: © Wackerhausen, ©, © Wackerhausen