A 457(b) plan is a type of retirement savings account named after the section 457(b) of the Internal Revenue Code that governs it. Often referred to simply as a 457 Plan, it shares many similarities with other tax-deferred, employer-sponsored retirement plans like 403(b) and 401(k) plans. All these retirement accounts are classified as defined contribution plans. Participants in a 457 Plan arrange for payroll deductions to direct a portion of their income into this tax-advantaged investment account. Established by the government in 1978, 457 Plans were created to benefit two specific groups of employers: government entities and tax-exempt organizations such as hospitals and charities.
Participants in 457 Plans arrange for a portion of their income to be automatically deducted from their paycheck and placed into a tax-free investment account. The United States government established these 457 Plans in 1978 as another form of defined contribution account. They were designed to benefit two specific types of employers: government entities and tax-exempt non-government organizations like hospitals and charities.
Despite their similarities, there are some distinctions between government and non-government 457 Plans. The primary difference lies in how they are funded. Government 457 Plans must be funded by the employer, while non-government 457 Plans are typically funded by employees themselves. In the private sector, non-profit companies usually offer 457(b) plans only to highly compensated employees, often those in upper management positions. Every 457 Plan requires both a plan administrator and a plan provider. Each plan offers a specific set of investment options that are unique to that particular plan.
The rules for rolling over funds from 457 Plans also differ from other retirement accounts. Non-government 457 Plans cannot be transferred to qualified retirement plans such as IRAs or 401(k)s; they can only be rolled over to other tax-exempt 457 Plans. Government-sponsored employer plans, however, have more flexibility. These plans can be rolled over to another employer’s 401(k), 403(b), or 457(b) plan, or to an IRA, provided the new plan allows such transfers. Government plans also allow for early withdrawals without the 10% penalty that usually applies to withdrawals made before age 59½; however, the withdrawn amount is still subject to regular income tax. Employees who change jobs may leave their money in the current plan if allowed.
Withdrawals are generally easier with government-sponsored plans. Individuals can make early withdrawals before reaching the retirement age of 59 ½ without incurring the usual 10% early withdrawal penalty, although the full amount withdrawn would still be taxed as regular income. Employees changing jobs may also have the option to keep their money in the plan if the plan permits it.
The rollover rules for 457(b) plans are fairly standard. If funds are distributed directly to the account owner, they have a maximum of 60 days to complete the rollover process. If this deadline is not met, the IRS considers the money to have been distributed and therefore taxable. Account owners are limited to one rollover per calendar year for these retirement vehicles, with the one-year rule starting from the date the 457 Plan distribution is received. During the 60-day rollover period, the money cannot be invested. To avoid the risks associated with the 60-day rule, account holders can opt for direct rollovers, where the plan provider transfers the money directly to the new IRA or retirement plan without the account holder ever receiving a distribution check.
Investment options in 457 Plans are more restricted compared to Self-Directed IRAs or Solo 401(k) plans. The plan provider limits choices to those that align with their plan. Depending on the plan’s provisions, owners may be able to invest their funds in individual stocks and bonds, fixed or indexed annuities, exchange-traded funds, and mutual funds. While physical gold bullion cannot be purchased through these plans, paper gold investments such as stocks of gold mining companies, mutual funds containing gold mining companies, or gold ETFs like GLD and mining ETFs may be permissible investment options.
