Retirement through a 457 Plan. It’s something that most of us don’t think we need to worry about until we get older. Retirement is also something that most of us don’t think we can worry about right now. After all, we have student loans, expensive healthcare costs, rising housing prices, kid’s college, aging parents, and a host of other financial worries that usually push the idea of retirement to the back of our mind. Additionally, retirement can be overwhelming. Most people have no idea what to invest in, how the investing process works, what tax implications our decisions may have, and most of all; how much money do you need to retire. 

While all of these questions will be answered in future articles, this article will start on the ground floor with the question: What are the different types of retirement plans? There are several different types of retirement plans and in this article, we will be addressing #14: 457 Plans. These articles will give you an idea of what to look for when deciding on how to save for retirement and what type(s) of retirement accounts to save in.

Types of Retirement Plans

1. Traditional IRA
2. Roth IRA
3. 401(k)
4. 403(b)
5. SIMPLE IRA
6. Simplified Employee Pension (SEP)
7. Salary Reduction Simplified Employee Pension Plan (SARSEP)
8. Payroll Deduction IRA
9. Profit-Sharing Plan
10. Defined Benefit Plan
11. Money Purchase Plan
12. Employee Stock Ownership Plan (ESOP)
13. Governmental Plans
14. 457 Plan (this article)

IMPORTANT: READ THIS BEFORE CONTINUING

Before we get into the types of retirement accounts, it is important to make one key distinction. A retirement account, itself, is not an investment. If you say something to the extent of, “My 401(k) hasn’t done very well this past year and I’m thinking of picking a different one” you would be making an incorrect statement.

Think of it like this: There are 14 different types of retirement accounts (we will discuss the other 13 in different articles). Each one of those retirement accounts should be thought of as a cooking pot. If you cook something in that pot and you don’t like what it tastes like, you don’t dump the contents into another pot and hope that it tastes better. You change the ingredients of that pot to something else. Now think of the ingredients as different investment products (stocks, bonds, cash, mutual funds, and/or a host of other products/ingredients).To get the taste you want, you change the ingredients, not the pot. You may be wondering, what ingredients do I put into my pot? That is a fair question, but you cannot answer that question until you figure out what pot is best for you. Now buckle up and find out what the 14 different types of retirement accounts (pots) you have at your disposal.

Credit: Nicholas Gras: https://unsplash.com/@armgd

(14) 457 Plans

A 457 Plan (the technical name is a 457(b) Plan) is a type of retirement plan that is generally available to government and municipal workers as well as police officers, first responders, and firefighters. A 457 Plan is called a Deferred Compensation Plan.

At its core, a 457 deferred compensation plan is a plan where the worker simply defers part of their compensation. It’s really not a whole lot more complicated than that :). The employee can forego a portion of their compensation now and have it available for future use upon retirement. 

A lot of times a worker who has a 457 Plan available to them also has a 403b plan available as well. The worker can choose to contribute to either plan or both (which is really cool).

There are some big differences between a 457 Plan and a 403b plan though. And so you can better make the decision to invest in a 457 Plan, a 403b, or some combination of the two. Let’s go over some of the ins and outs of a 457 Plan.

1. Investments: Typically a 457 Plan doesn’t let you have the same number of investments as other retirement accounts. Usually a 457 Plan is reduced to being invested into annuities and/or mutual funds. This is not necessarily a bad thing. There are a lot of mutual funds out there that are really solid. Just know that you will probably not be able to invest in UITs, single stocks, etc. in a 457 Plan.

2. Contribution Limits (as of 2021): A 457 Plan has an annual contribution limit of $19,500 (just like a 403b or a 401k). A 457 Plan also has a catch up procedure for workers who are 50 years old or older. This means that a worker who is at least 50 years old can contribute an extra $6,500 to their 457 for a total of $26,000 per year. A 403b has the same catch up contribution limit. But this is where a 457 Plan starts to diverge from a 403b plan.

For workers who are within three years of retirement (regardless of age) can contribute 2x the annual limit! That is a really good option! That means that workers can contribute up to $39,000 per year for the three years before they retire. 

3. Tax Treatment of 457 Plans (as of 2021): In a regular 457 Plan, a worker will contribute to the plan pre-tax. This means that they will not pay tax on the money that they put into it until they pull the money out when they retire. It is much like a regular IRA or 401k. 

A 457 also has a Roth option. This means that the owner of a 457 Plan can contribute to the plan post-tax. This means that the worker pays the tax up front and when they retire and start withdrawing money, there are no taxes on the money they put in nor the growth. Think of it as paying taxes on the seed and not the harvest. (This is a great option.)

4. Early Withdrawals: This is the best part of a 457 Plan. Unlike any other retirement plan other than a pension, 457 Plans often let the worker take money out of the account to retire BEFORE age 59 ½! This is awesome!

A 457 Plan will allow the worker to retire early if they choose. My own grandfather did this. He was able to retire at 55 because he properly used a 457 Plan as well as a state pension.

The reason that workers are able to sometimes take money out of a 457 Plan is because most of the people who have 457 Plans have hazardous jobs and retire much sooner. Think of police officers, firefighters, first responders, etc. There are not a whole lot of 70 year-old highway patrolmen running around. Because of the nature of their job, they cannot work as long. And in some cases, they are even required to retire earlier.

By having a 457 Plan they can retire early and not have to pay penalties to do so.

Final Thoughts

A 457 Plan is a really good retirement plan. Sure the investments in a 457 are not always the greatest, but it does give public servants the ability to retire early when they need to. Also it is really great that there is now a Roth option for a 457 Plan.

If it were me, and I had a job as a police officer or firefighter I would invest into my 457 Plan as well as my 403b offered at my job. I would invest in the 457 Plan to get me from the age of retirement (say 52 or so) until age 59 ½ when I could start withdrawing money from my 403b without penalties.

When the two plans are used to compliment each other, they can be quite effective.

And btw, if you are reading this and are a police officer, firefighter, first responder, or the like, thank you for serving your community. We really appreciate you. 🙂

Until next time!