A Section 457(b) deferred compensation plan is a form of a retirement savings plan allowed under Section 457(b) of the Internal Revenue Code. It permits public employees to save for their retirement without paying income taxes on the money they save or on any earnings on that money until they are withdrawn.
Under current tax law, you may contribute $18,000 a year (limit for 2017). Thereafter, the limit will increase in increments of $500 for cost-of-living increases. This limit includes any employer contributions to this plan, if applicable. Your representative can help you determine specifically how much you can contribute.
Current IRS guidelines allow an individual who has attained age 50 within the calendar year to make an additional pretax catch-up contribution if allowed by your plan provisions. For 2017, the additional catch-up amount is $6,000. A participant may also be eligible to make additional contributions in one or more of the participant’s last three taxable years ending before the plan’s normal retirement age. Your representative can help you determine specifically how much you can contribute.
Your contributions are automatically deducted on a pretax basis directly from your paycheck. To enjoy the convenience of payroll deduction, you and your employer simply complete a salary reduction agreement to allow your contributions to be deducted from your paycheck and added directly to your Section 457(b) retirement plan.
You can receive money from your Section 457(b) retirement plan when you retire, if you separate from service with your current employer, or in the event of an unforeseeable emergency. Normal retirement age and an unforeseeable emergency are both subject to the IRS definition. You must begin to take distributions from your Section 457(b) retirement plan no later than April 1 of the year following either the year in which you reach age 70½ or the year in which you retire, whichever is later.
By contributing to a Section 457(b) retirement plan, you will automatically reduce the amount of income tax you currently pay. The amount you contribute is not reported as taxable income on your W-2 to the IRS. (For example, if your salary is $26,000 and you put $100 a paycheck into your Section 457(b) plan for a total of $2,600 a year ($100 x 26 pay periods), you will pay federal taxes on just $23,400 instead of your full $26,000 salary, saving you more than $700 in current taxes.) Of course, you can’t defer taxes forever. When you begin taking money from your plan, your withdrawals will be subject to ordinary federal income taxes.
If your new employer offers a Section 457(b) retirement plan, you can transfer your money to the new plan without tax consequences. Assets held in a Section 457(b) retirement plan can also be rolled into certain other types of qualified plans, including individual retirement accounts (IRA). You may also receive a lump-sum distribution or installment payments. These amounts will be subject to federal withholding and state tax withholding, if applicable. Your 457(b) account is not subject to the 10% early withdrawal penalty. You should work closely with your financial professional and tax advisor to determine the option which best suits your situation.
The contributions you make to your Section 457(b) retirement plan are immediately vested. However, they must remain part of a Section 457(b) retirement plan until IRS regulations allow you to withdraw them.
This information is provided by Ameritas®, which is a marketing name for subsidiaries of Ameritas Mutual Holding Company, including, but not limited to: Ameritas Life Insurance Corp., 5900 O Street, Lincoln, Nebraska 68510; Ameritas Life Insurance Corp. of New York, (licensed in New York) 1350 Broadway, Suite 2201, New York, New York 10018; and Ameritas Investment Corp., member FINRA/SIPC. Each company is solely responsible for its own financial condition and contractual obligations.
Ameritas® does not provide tax or legal advice. Please consult your tax advisor or attorney regarding your situation.