457b Deferred Compensation Planning

457b

A 457 plan or 457(b) plan is an employer-sponsored, tax-favored retirement savings account. This type of plan is offered to state and local government employees, including police officers, firefighters, and other civil servants. Some high-paid (or “top hat”) executives at certain nonprofits like hospitals, charities, and unions also get access to 457(b) plans. You can think of the 457(b) plan as a 401(k) for the government-worker set.

These programs provide important tax preferences to help our civil servants save in addition to their primary retirement plan (state pension or police & fire pension).  With the trend of public pensions reducing benefits and the probable likelihood that Social Security will reduce future benefits, it is becoming increasingly more important for employees to understand and utilize these programs. Watch the video below for a more detailed explanation from our senior advisor:

 

Advantages

There are significant tax advantages for participants in a 457(b) plan:

  • Contributions to a 457(b) plan are tax-deferred.
  • Earnings on the retirement money are tax-deferred.

 

A 457(b) plan is a lot like a 401(k) or 403(b). And it’s not just because they all get their cryptic parenthetical names from their spots in IRS tax code. These plans all offer individuals a great way to save for retirement. A 457(b) plan is offered through your employer, and contributions are taken from your paycheck on a pre-tax basis, which lowers your taxable income (a good thing come tax time). You can invest the contributions in mutual funds that you choose from an array of options. And the interest and earnings on that money are not taxed until you withdraw the funds at retirement.

That means the money has the opportunity to accumulate more quickly in the meantime.

Contribution Limits

457(b) plans of state and local governments may allow catch-up contributions for participants who are aged 50 or older.

A 457(b) plan’s annual contributions and other additions (excluding earnings) to a participant’s account cannot exceed the lesser of:

  1. 100% of the participant’s includible compensation
  2. The elective deferral limit ($19,000 in 2019 and $18,500 in 2018)

Special 457(b) catch-up contributions, if permitted by the plan, allow a participant for 3 years prior to the normal retirement age (as specified in the plan) to contribute the lesser of:

  • Twice the annual limit $38,000 in 2019 and $37,000 in 2018
  • Or the basic annual limit plus the amount of the basic limit not used in prior years (only allowed if not using age 50 or over catch-up contributions)

457b's And Employer Matching

Some employers may match the amount that you contribute to a 457(b) plan up to a certain limit. If you are lucky enough to work for such an employer, it is a good idea to take advantage of it by contributing to the plan at least as much as the match. If the match is 50% and you put in $1000 per month, your employer is giving you an extra $500. It’s like the raise you’ve been waiting for.

Not all government employers are required to offer employees access to a 457(b) plan, as nonprofits are required to offer 403(b)s. But if your employer does not currently offer a 457(b), it doesn’t hurt to lobby for one. When it comes to retirement plans, you would be lucky to have the chance to save in a 457(b).

403b

There are two ways that clients can compensate rF for their services.  Many universities allow us to “fee-billing” for our services.  This means that we can directly bill the clients accounts, without money having to come directly out of their pockets.  However, some universities limit the number of financial companies that can “fee-bill”, thus limiting the options employees have.  If you are at a university that limits “fee-billing”, then you can talk to the human resource department (HR) or group the facilitates the 403b about adding us as one of those companies.  With enough employees wanting other financial advisory firms, the university is usually willing to listen and add those companies.