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457 Plans

457 Plans
A 457 plan is a defined contribution retirement plan for employees of state and federal governments and agencies and certain tax-exempt charitable organizations. 457 plans are named after Internal Revenue Code Section 457.

Contributions are made with pre-tax money and earnings and contributions are tax-deferred while they are in the plan. Generally, contributions are made by the employee and not by the employer. Some plans have contributions by the employer.

The general tax rules described below are the federal income tax rules as of January 1, 2001) and may be subject to exceptions. Always check your state (and local) income tax rules on 457 plans. Finally, since tax laws may (and probably will) change from time to time, always check with your tax advisor before making major decisions regarding your 457 plan.
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Employees of qualifying organizations may participate.

Contribution Limits
There's a general rule and a special catch-up rule.

The General Rule
Basically, you can contribute the lesser of:

1. 17,500 in the year 2013 or
2. 25% of your compensation before taxes and 457 plan contribution (this is equal to 33 1/3% of your includable compensation).
Catch-up Contributions
During the last three years before reaching normal retirement age, employees may make contributions of up to $15,000 year. That amount is allowed to the extent the general rule limits (i.e., the lesser of ? or 33 1/3% of compensation) have not been used in prior years.

Employee contributions are 100% vested. Employer contributions can be 100% vested if you work long enough or if the plan requires 100% vesting.

Benefits of the 457 Plan
1. Contributions can be up to lesser of 17,500 or 33 1/3% of compensation (special catch-up contributions may be allowed, too).
2. Contributions aren't considered part of an employee's salary for income tax purposes.
3. Earnings and contributions grow tax-deferred without any reduction for income tax each year.
4. Employee contributions and earnings are 100% vested.
5. You may be able to borrow from the plan.
6. You may delay the start of distributions beyond age 70 if you continue to work.
7. No penalty for distributions before age 59.
8. Special creditor protection may be available.
Negatives of the 457 Plan
1. Distributions of earnings and contributions are taxed at ordinary income tax rates (from 15% to 39.6% for federal tax plus state tax as of January 1, 2001).
2. Employees generally make the contributions, and there usually is no employer match or contribution.
3. Employer contributions and earnings may have vesting requirements.
Timing of Distributions
Distributions may also be made when you:
1. separate from your employer's service (when you no longer work there) or
2. are age 70 or
3. become disabled or
4. have an unforeseen financial emergency (not all plans allow this and there are detailed IRS regulations defining what is and is not an unforeseen emergency-note that paying college expenses or buying a home is not an unforeseen emergency) or
5. die.
You must start taking distributions by April 1 of the year after you reach age 70. However, if you want to delay distributions until you stop working after age 70, you can wait until April 1 of the year following retirement.

Special Election
Between the time benefits may be paid to you and the time they have actually started, you can make a one-time election to delay the benefits.

Income Taxes & Penalties
Distributions of earnings and contributions are usually subject to federal and state ordinary income tax ( the federal rate is from 15% to 39.6%, as of January 1, 2001).

Unlike other retirement plans which can impose a penalty on distributions before you are age 59, 457 plans do not have this penalty.

If you don't start taking the required distributions by age 70 or qualify to receive later distributions, a penalty will be charged.

Beneficiary Designations
Legal and tax advice is useful when determining how to complete beneficiary designations. Properly completed designations can help save estate (death) tax, avoid probate, allow better income tax opportunities and avoid creditor claims on retirement assets.

Extra care needs to be taken in naming trusts as a beneficiary of most retirement assets in case of a death. Sometimes, naming trusts as a beneficiary can trigger income tax sooner than it would otherwise be owed and reduce the amount ultimately shielded from death tax.

Note that many plans require the participant's spouse to be the beneficiary, unless the spouse provides written permission for another beneficieary to be named.

Creditor Protection
Retirement plans and accounts may have special creditor protection under federal and/or state laws. Different types of plans and accounts may have varying degrees of protection. State protection rules may also vary from state to state.

If you convert from one type of plan to another (e.g., from a traditional IRA to a Roth IRA), you may be changing how much protection you have. This may be also be the case if you move to another new state where the new state rules are different.

Consulting with an attorney for guidance on the creditor protection issue may be helpful.

Estate and Death Taxes
Retirement assets are added to your other assets and may be subject to federal and/or state death (estate) tax. It depends upon the size of your overall estate and the estate planning done for you. Consult with your advisor about ways to defer or avoid estate tax.

For more information:
If you'd like more information about how diversified investment advisors can help you achieve your financial objectives through personalized wealth or retirement and risk management strategies, please contact us. We welcome the opportunity to discuss your unique needs and how we may best meet them.

This page (formatted for versions 10.0 and higher of Internet Explorer) is updated regularly so check in from time-to-time to see new articles and updates. You can click on any underlined words on each page to see a specific wealth management topic in the left margin of each page.

Charles M. Bloom, Registered Principal offers securities and advisory services through Centaurus Financial, Inc. - Member FINRA and SIPC - 775 Avenida Pequena, CA, 93111 (mailing address: 3905 State Street Suite 7173, Santa Barbara, CA, 93105) - CA Life Insurance License No. 0A52786 - Centaurus Financial, Inc. and Shoreline Wealth & Investment Management are not affiliated companies.

The information contained in this web site is neither an offer nor solicitation of any security or service.


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