RC 457(b) Deferred Compensation Plans
Plans of deferred compensation described in IRC section 457 are available for certain state and local governments and non-governmental entities tax exempt under IRC Section 501. They can be either eligible plans under IRC 457(b) or ineligible plans under IRC 457(f). Plans eligible under 457(b) allow employees of sponsoring organizations to defer income taxation on retirement savings into future years. Ineligible plans may trigger different tax treatment under IRC 457(f).
Who can establish a 457(b) plan?
The organization must be a state or local government or a tax-exempt organization under IRC 501(c).
How do 457(b) plans work?
Employers or employees through salary reductions contribute up to the IRC 402(g) limit ($18,500 in 2018; $18,000 in 2015 - 2017) on behalf of participants under the plan.
- 100% of the participant's includible compensation, or
- the elective deferral limit ($18,500 in 2018 and $18,000 in 2015 - 2017).
Increases to the general annual contribution limit:
457(b) plans of state and local governments may allow catch-up contributions for participants who are aged 50 or older.
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 ($37,000 in 2018 and 36,000 in 2015 - 2017), 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)
What are the advantages of participating in a 457(b) plan?
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.
Can a 457(b) plan include designated Roth accounts?
Yes, a governmental 457(b) plan may be amended to allow designated Roth contributions and in-plan rollovers to designated Roth accounts.
This information is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor.