What is a 457 plan?

A 457 plan is a retirement plan for state, city, town and government subdivision employees. It is an employer-sponsored deferred compensation program. You defer paying taxes on that part of the income you pay into your retirement savings. 457 plans are similar to 401(k) plans.

(Some 457 plans specifically set up for tax-exempt organizations are geared only for upper management and have their own rules for eligibility, distributions and vesting. See your Human Resources or benefits representative for details about your plan if you work for a tax-exempt organization.)

Are 457 plans the same as 401(k) plans?

There are similarities and differences. 457 plans are the same as 401(k) plans in that they are both salary-deferred plans and both allow tax-preferred status. However, 457 plans are not subject to certain reporting, disclosure, and discrimination-testing requirements. 401(k) plans, on the other hand, are always subject to disclosure, reporting, and fiduciary requirements under the Employee Retirement Income Security Act (ERISA).

What happens to my 457 plan if I switch jobs?

You can transfer the money to a new 457 plan if your new government employer has one and allows transfers. You can also withdraw the funds, or keep them where they are until retirement. If you are an employee of a tax-exempt organization, different rules may apply. Check with your employer's Human Resources Department or benefits representative for details. See 2002 tax law changes.

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What are my rights in a 457 plan?

In a government-sponsored 457 plan, you have the right to contribute part of your salary into a 457 plan. Each state and city government has its own rules for the type of benefits information that must be provided to employees. This information will typically include information about funding information, eligibility requirements, distribution requirements and procedures.

Do I get to choose how my money is invested?

Yes. These choices might include mutual funds and variable annuities or fixed annuities. For greater security you could also have a money-market option security. You should check with your employer to explore your investment choices.

Who administers my 457 plan?

A plan administrator is hired by your employer to handle your plan and answer any questions for you. Ask the person in charge of Human Resources or benefits at your place of employment about whom to contact to answer your inquiries.

When can I start paying into the plan?

Ask your employer. Some allow you to begin paying into your plan right away. Others may have you wait up to a year before you can begin. Generally, a participant fills out a salary-deferral agreement prior to the first day of the month in which compensation is going to be deferred. Sometimes a new employee's compensation can even be deferred for the month during which the participant was first hired, if the employee completed a salary-deferral agreement before the first day of work.

What does "vested" mean?

This applies if your employer also contributes to your 457 plan. The money the employer pays into your account might not actually be yours right away. If you leave your job, your employer might require that you will have worked there for a certain amount of time before those contributions are considered yours. This is called vesting.

Most employers do not offer a feature whereby the employer matches your contributions.

If your employer does offer a feature that requires vesting, there are several possibilities:

• That you vest nothing until a certain number of years have passed, and then you become fully vested, or,

• With each year you remain with your employer, a certain percentage belongs to you.

Either way, you won't be taxed on your employer's contributions until you withdraw them—if the plan is eligible.

If you work for a tax-exempt organization, your employer will pay in a certain amount of money after you have been employed there a specified amount of time. Then, the funds move to you and you are then taxed on them. You should check with your Human Resources department or plan administrator for details about the rules governing vesting.

How do I contribute to my 457 plan?

First, you determine the percentage or amount of your salary that you would like to pay in. That amount is then deducted from your paycheck. Then it is deposited into your 457 account and allocated to your chosen investments. Generally, the amount you defer is shown on your salary-deferral agreement form and appears on your paycheck. Consult your Human Resources or benefits representative for details. Different rules apply.

What is the most money I can contribute to my 457 plan?

Up to $8,500 per year or one-third of your "includable" compensation, whichever is less. Includable compensation does not include contributions to a 401 (k), SEP or SIMPLE plan, or 403(b).

What can I contribute?

For 2007, workers are able to contribute the lesser of:

1. the new employee elective deferral limit of $15,500, or
2. up to 100% of includable compensation (must be less than the elective deferral limit).

Note: The total amount you can contribute is updated and indexed annually for inflation.

Can I make after-tax contributions?

No, you cannot.

What are the catch-up provisions in a governmental 457(b) plan?

If you are age 50 or older in year 2007, you may contribute an additional $5,000 above the 2007 elective deferral limit of $15,500. This catch-up option is only available in public (governmental) 457(b) plans. The 457(b) plan contains a special "catch-up" provision called the "final three year" provision for those approaching retirement (assuming they haven't contributed the maximum amount in prior years). This provision, which used to limit participants to an additional $15,000 over a 3-year period prior to normal retirement age, now permits up to 200% of the elective deferral limit, or $31,000 in 2007

Will my employer match my contributions?

It depends on your employer. Most 457 plans do not offer a matching feature. Check with your Human Resources officer or plan administrator. If you do receive employer-matching contributions, you may be required to work for your employer for a certain period of time before these contributions become "fully vested" (belong to you).

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How soon can I take money out of my plan?

You can withdraw your money once you retire or leave your employer. At that point you must pay taxes on the amount you withdraw.

You can either withdraw your money gradually, or you can withdraw all the money at once.

If you have under $5,000 in your 457 plan (and you have not made a payment in two years) you are eligible to withdraw your funds whenever you choose.

Consult your Human Resources or benefits representative if you work for a tax-exempt organization. Different rules apply.

What about emergencies? Can I withdraw my money?

For certain "unforeseen emergencies" you may be able to withdraw money from your 457 plan. An unforeseen emergency is something like an unexpected illness, accident, or casualty. However, other expenses like paying college tuition or buying a house are not "unforeseen emergencies." For details, please contact your employer's Human Resources or benefits representative, or your plan administrator.

What is the penalty if I take money out before age 59?

There is no penalty for withdrawing funds before age 59, unlike 401(k) plans. However, it is taxable as income. While you are still working, you can only withdraw funds under certain rules. Depending on the rules of your plan, you need your employer's permission to withdraw the money.

When am I required to take the money out of my 457 plan?

In a governmental 457 plan, you must start withdrawing money no later than April 1 of the year following the calendar year in which you turn 70. You withdraw the money according to a preset timetable based on your life expectancy, or you can withdraw it in one lump sum or any amount in between.

In 2002, new tax laws apply.

Different rules apply if you work for a tax-exempt organization. Ask your Human Resources or benefits representative for details.

You may continue to contribute and keep your money in the plan if you are still working -- even beyond age 70.

Note: Special rules apply for independent contractors.

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What if I inherit somebody's 457 plan?

That depends on whether you are the account owner's spouse, and whether the owner of the plan died before April 1 (the date for beginning required minimum withdrawals) after that person turned 70.

If the owner of the plan dies before the age for making required minimum withdrawals, you have the option to withdraw all the money in the account over your single life expectancy. This must be done by December 31 following the year of the account owner's death. Otherwise, you must withdraw all moneys from the account within five years.

Under new rules issued by the IRS, if the 457 owner dies after beginning to withdraw the required minimums, you may receive the moneys over your single life expectancy.

When I retire, will my 457 distributions affect my Social Security benefits?

Social Security benefits will not be affected. But, distributions will be included in calculating your total income, which may result in the taxation of your Social Security benefits.

What are the tax advantages to contributing to a governmental 457 plan?

The money you earn is tax deferred. The federal government and most state governments will defer taxing you on the money you pay in, and they will not tax any of your investment profits, until you withdraw money. If you invest money prior to paying taxes more of your money goes to work for you immediately.

For instance, if you pay in $100 (and are in the 28 percent tax bracket), your federal income-tax withholding will be reduced by $28. That means that your $100 contribution only "costs" you $72 of your take-home pay.

What does "tax-deferred" mean?

Taxes that you "defer" (or put off paying) now will have to be paid later when you withdraw your money.

What are my investment choices with a governmental 457 plan?

Though it depends on how your plan is structured and what your employer decides, you may have a number of investment choices. These choices might include a mutual fund of growth stocks, a bond fund that is income-generating, and funds that have some of each for added safety.

For even greater security (but less growth potential) you could also have a money-market option security. You may have a variety of investment choices. Check with your employer.

Can I decide how to invest the money in my account?

Depending on your specific plan you usually are allowed choose how to invest the money, and most plans have many options.

How often can I change my investment allocation?

That depends on your specific plan, but generally most plans allow ample flexibility to re-allocate your assets.

Where can I learn more about the funds available in my 457 plan?

See your employer's plan administrator details on your investment options. Also, check with Human Resources or your payroll department. Or, sometimes it is your comptroller's office that has the best information.