Eligible 457(b) plans are retirement savings accounts that offer rollover privileges similar to an IRA. A Northwestern Mutual financial advisor can assist in developing a savings strategy tailored specifically for you that integrates different retirement vehicles to meet your unique retirement needs.
The 457(b) plan provides government employees with tax advantages by deferring taxes on contributions; however, this strategy can present unique tax complications during retirement.
What is a 457b plan?
A 457b plan is a tax-deferred retirement savings account typically offered to employees of certain governmental agencies or tax-exempt organizations such as universities, hospitals and credit unions. It differs from 403(b) plans which typically cater only to private employers.
While both plans may appear similar, there are several key distinctions. When withdrawing funds before reaching age 59.5 from a governmental 457(b), any withdrawal is taxed as ordinary income and only distributions from said plan can be transferred to another governmental plan or tax-exempt nongovernmental 457(b) plan.
Rollover rules from nongovernmental 457(b)s to traditional IRAs are more stringent; you are only eligible to transfer assets between accounts in this manner.
One advantage of moving assets into an IRA is having access to more investment options, helping diversify and reduce volatility of your portfolio. Furthermore, consolidating assets under one account makes managing them simpler; you can set one up through any number of financial institutions according to your preferences and investment goals.
What are the advantages of a 457b plan?
A 457(b) plan can be an excellent retirement savings vehicle for state and local government employees as well as certain non-profit organizations. Similar to 401(k) and 403(b) accounts, 457(b) funds may be withdrawn without penalty upon leaving employment or at retirement age; however, all distributions from 457(b) plans still need to be taxed as ordinary income.
Employers typically match employee contributions to 457(b) accounts, adding pretax dollars that grow tax free until withdrawal – similar to regular IRA investments. Some 457(b) plans also allow workers to save extra money starting three years prior to reaching normal retirement age through the special Catch-up Contribution feature.
As with any retirement account, a 457(b) can be an essential element of financial planning. When done effectively, rolling over from a 457(b) to an IRA can provide increased flexibility and investment options while streamlining asset management – particularly during job changes or nearing retirement. A Northwestern Mutual financial advisor can help assess your individual circumstances to devise an ideal rollover solution tailored specifically to you and your unique financial circumstances.
What are the disadvantages of a 457b plan?
One major disadvantage of non-governmental 457(b) plans is that they are susceptible to employer creditors, unlike more secure 401(k) and IRA plans. This puts your funds at risk should your employer declare bankruptcy or otherwise go out of business, and withdrawals from these types of plans are subject to taxes rather than being tax-deferred like other retirement accounts.
At separation from employment, many non-governmental plans impose withdrawal rules that force you to access the entire balance in a short window and potentially leave you in an awkward tax position.
Governmental 457(b) plans offer more flexible withdrawals options; you may choose to transfer funds into an IRA or 401(k), for tax-deferred savings; alternatively, these plans can serve as supplements to other retirement savings vehicles.
To maximize your retirement savings, it is critical to coordinate all of your different savings and investment vehicles. A Northwestern Mutual financial advisor can help by taking an overarching look at your needs and goals to identify how various savings and investment vehicles can work together towards reaching them.
