A 457 is only slightly different than a 401(k), but the differences can be important. Although the two plans are similar in practice, there are some very important differences.
Former employees can withdraw from their accounts penalty-free after they have separated from service, even if they are under 59 ½. 457 plans must also be offered to independent contractors, which 401(k)s do not. 457 plans are offered to state and local public workers and employees of certain nonprofits.Top-hat 457 plans can also be offered to highly compensated employees without being offered to other employees, at both non-profit and for-profit businesses.
If your employer only offers a 457 Plan, then the contribution limits are the same as the elective deferral limits are for a 401(k): as of 2016, $18,000 is the annual limit for people under age 50, and an extra $6,000 can be contributed by people over 50 as a catch up contribution, just like a 401(k) – but this catch-up is only allowed if the plan is sponsored by a government employer.
457 plans have their own alternative catch-up contribution formula, which can be used by employees of governmental and non-governmental entities: if a person has three years until normal retirement age (the NRA is defined by the IRS and is 67 for most people now), they are able to contribute up to twice the annual deferral amount if they have not contributed too much in recent years.
Non-governmental 457 plans are not permitted currently to be rolled over into any form of retirement plan except another 457 plan. Non-governmental plans require that the employer remains in control of the assets and that they can be attached by creditors of the company. If the employee becomes vested in these accounts, it is considered a taxable event.
It is also important to not that 457s are eligible to be funded up to their maximum deferral limit alongside a 403(b) or 401(k) plan, allowing an employee to contribute the maximum deferral limit to both of the plans. 457 plans also do not have to file a 5500 with the IRS every year, as most plans do, because it is a non-qualified arrangement. This cuts down on administrative costs and paperwork.
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