Hello everyone,
My name is Ryan Benson and I am new to IFP. I am very excited to start as a financial planner with Dan and get to know you during future meetings. As a former secondary school teacher, I love sharing information to empower people. I am also excited that we are starting up our blog posts again. To kick things off, I wanted to talk about a retirement plan that I actually used as a teacher: 457 plans. I encourage you to read my bio on our website so that you can learn a little about me before your next meeting with Dan.
I love 457 plans. They are special, and there is more that you can do with them than you think. But what are they? 457 plans are essentially 401Ks but with a twist, and a nice twist at that. 457 plans are primarily used for municipal and state employees. So if you work for a school district, a local government, or a state government organization, there’s a chance that you have access to a 457 plan. A 457 plan is essentially a 401k-like plan for these organizations. 457s can also be used by non-governmental organizations, but their flexibility is somewhat limited compared to governmental 457s. So you have to work for a government organization or a non-profit organization to access one.
Ok so here’s the lowdown and the big 2 things that make 457s special. 1) It does not affect your ability to contribute to a deductible IRA whatsoever. For 2021, if you participate in a qualified plan at work (like a defined benefit pension or 401k plan), you are not able to contribute to a deductible IRA if you make greater than $76,000 (single) and $125,000 (MFJ). And your spouse (assuming they don’t work) can’t contribute to a deductible IRA (called a spousal IRA) if you make greater than $208,000. But here’s the crazy thing… participating in a 457 isn’t a qualified plan! So your income doesn’t matter. You can make a million dollars a year, and if a 457 is your only retirement savings plan through your employer, you can STILL contribute to a deductible IRA. Now that’s cool.
The second big advantage is in the last 3 years before retirement, you can (essentially) double your retirement savings. That’s right I said double your retirement savings. In 2021, the limit for 401k deferrals is $19,500. For some, that limit isn’t reached. But for others, they may wish that limit could be higher. The more we put into tax-sheltered accounts like retirement accounts and IRAs, the better the compounding effect of time will be for our retirement savings. Normally, 457s have the same deferral limit as 401ks ($19,500 for 2021), but in the last 3 years before full retirement age (FRA – usually 65), you can double that amount. So the deferral limit for 457 plan participants that are within 3 years of their FRA would be $39,000 for 2021. Wow! Talk about nice. Usually if you’re at the end of your career, your salary is as high as it’s going to be, and you would be in a great position to take advantage of this higher deferral limit.
You may ask, why do 457s have these special rules? Well, 457s are technically assets of the employer (not the employee). It’s a form of non-qualified deferred compensation, which is a fancy few words for “it’s not fully yours yet”. Creditors of employers that offer 457 plans could access to your 457 plan funds in the event of bankruptcy.
So who would benefit from 457s? Well there are 2 types of clients that would strongly benefit from 457s.
· The spouse of a worker that makes a large salary.
· Someone who is close to retirement.
*It’s worth noting that for people who participate in 457s, it’s likely they have access to a defined-benefit pension retirement plan. If you are getting close to retirement and expect to have a pension, please meet with a financial professional before deciding what kind of pension you pull. There are strategies (such as the “pension max” strategy) that can maximize your pension benefits. At IFP, we would be happy to meet with you to conduct a pension analysis to determine the best option for you.
In summary, a 457 plan is a fantastic way to save for retirement, and its special added perks make it more flexible than a 401k. It’s a nice little positive bonus for state and local government employees (and some government-affiliated non-profits) who serve our communities. If you want more information, you can find it here.
