What Are 457 Plans

What Are 457 Plans

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What Are 457 Plans

A 457 deferred compensation plan is a retirement plan which allows government, and some non-government, employees to save money for retirement. The 457 plan must be offered by the employer as a retirement option in order to create an account. The Internal Revenue Service (IRS) does not consider the 457 deferred compensation plan to be a qualified retirement plan. A qualified retirement plan is any plan the meets the basic requirements under Section 401A of the Internal Revenue Code and the 401(k) plan 457 plans do not permit employers to make matching contributions as with a 401(k) plan.

This means that the amount of the retirement package received annually at retirement age is based solely upon the contributions made by the employee into the 457 account. Unlike a 401(k) retirement plan, an employee with a 457 deferred compensation plan can make withdrawals at any time and not be penalized for the withdrawn amount. The employee must still pay federal income taxes on that money withdrawn, but he or she will not have to pay an excise tax. An excise tax is a 10 percent penalty placed on the funds taken out of a 401(k) plan.

Most 457 deferred compensation plans allow employees to have the option to create 401(k) plans and 403(b) plans to help prepare for retirement. This means that the employee can make contributions up to the mandated limit as set by the IRS. For 2009 and 2010 the limit is $16,500, meaning an employee can make annual contributions of up to $16,500 in all three accounts without being penalized. However, non-government 457 plans do not permit 457 contributions to be transferred to many retirement plans, i.e. a 401(k) plan.

457 plans function as they do because of the changes made under the Non-governmental 457 plans are available to some non-profit organizations and educational institutions. The reason these non-government organizations are able to utilize 457 plans is because they cannot offer any other non-qualified deferred compensation plans for retirement. However, some of these organizations, depending on which 457 plan they offer may be subject to additional taxes.

One such tax is noted under Section 409A of the Internal Revenue Code which was passed in 2004. Also, the contributions placed in a 457 deferred compensation plan cannot be placed in a trust under the Internal Revenue Code because the funds set aside for retirement in this plan must remain in the ownership of the account holder.

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