What Are Benefits of 457 Plans?
There are many different kinds of retirement accounts. Among employer sponsored retirement plans, the most common is the 401(k) account. Lesser known is the very similar 457 plan, which offers all of the benefits of a 401(k) plan with some extra benefits of its own.
A 457 plan is a deferred compensation plan. Like a 401(k) plan, a 457 must be offered by the employer for an employee to contribute to a 457.
457 plans are only allowed for state and local governments and certain tax-exempt organizations.
401k vs 457
The main difference between a 401(k) plan and 457 plan is that the 457 offers a special provision that allows all funds inside of a 457 to be withdrawn without penalty when the account owner separates from service of the employer. Although there is no tax penalty, all regular income taxes must be paid.
In other words, if an employee has both a 401(k) plan and a 457 plan, they may take the money from the 457 plan without penalty if they quit or are fired, regardless of age. If they are under 59 1/2 , taking money from the 401k account would be subject to a 10 percent tax penalty. In both cases, the entire amount of the withdrawal would be subject to ordinary income taxes.
Have Both 401k and 457 At Same Time
The other major benefit of a 457 plan is that if both a 457 and 401 are offered, an employee may contribute to both plans at the same time. The amount of money contributed to a 457 plan does not reduce the maximum contribution to a 401(k) plan, so in essence, an employee could contribute “double” by contributing the maximum to both retirement plans at the same time.
457 plans may also offer loans like 401(k) plans and starting in 2011, 457 plans can also offer designated Roth accounts. These designated accounts provide the same benefits of a Roth 401k type account, which in turn offer many of the same benefits of a Roth IRA.