Q:

What is a 457(b) plan?

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Quick Answer

A 457(b) plan, also known as deferred compensation, is a retirement and savings program for state governments, local governments and certain tax-exempt organizations that allows employees to defer a portion of their salaries into specific investment accounts, such as a Roth IRA. Employees enroll in 457(b) plans through their employers.

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Full Answer

To enroll in the 457(b) plan, the employee signs a Salary Deferral Agreement. Because employers do not extend these plans to all employees, those employees wishing to enroll must first check with their employers to ensure plans are available to them. This agreement outlines the amount of pre-taxable income chosen for deferment and to which investment accounts it transfers the funds.

The IRS provides in-depth guidelines on maximum deferment amounts and related publications for 457(b) plans on its website, Irs.gov. One benefit of these plans is that they are tax-deferred, meaning the funds invested are non-taxable until they are paid out, typically upon retirement. Other possible benefits include protection against garnishments, the option to withdraw funds in an emergency, competitive loan rates, investment growth, and a tax credit for elective deferrals known as the Saver's Credit. These plans are different from a traditional IRA or pension plan because they are selected and controlled by the enrolled employee, according to 403bwise.com. Examples of workers eligible to enroll are public school employees, park employees and law enforcement officers.

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