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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Eligibility
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.
Vesting
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 70½ if you
continue to work.
7. No penalty for distributions before age 59½.
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 70½ 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
70½. However, if you want to delay distributions until you stop working after
age 70½, 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 59½, 457 plans do not have this penalty.
If you don't start taking the required distributions by age 70½ 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.
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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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