457 Account rules

A 457 account is a retirement plan for employees who work in government or other non-taxable organizations. The 457 plan rules are similar to other plans, but can be more restrictive.

What is a 457 Plan?

As stated above it is a retirement plan for all government and non taxed organizations such as a charity or a school. Similar to a 401k the money is taken out of your paycheck before you receive it, letting you invest money tax deferred into the plan automatically each month.

There are basically 3 different kinds of 457 plans out there, the 457 (b) Government 457 (b) Non-Government, and the 457 (f).

457 (b) Non Government

This is the plan that all non-taxable organizations, like the Red Cross, are allowed to offer. The plan can be a little restrictive, but it still offers a tax break.

The maximum contribution is $16,500 a year for 2010 and it is expected to go up $500 every year after that. All the money invested into it and the interest earned is not taxed until the holder starts to take it out. And if the holder takes the money out prior to reaching the age of 59 ½ there will be an extra 10% early withdrawal penalty.

The 457 and 401k plans are very similar, but there are a few disadvantages to holding a 457 account.

1. You cannot transfer it to a different plan, for example an IRA

2. The plan is in your name and therefore accessible to creditors

3. There is no 5,500 catch up bonus once you reach the age of 50

4. It is for Highly Compensated Employees only

457 (b) Government

This plan can only be used for government positions. It is pretty similar to the non government plan, except it has two major differences.

1. All employees can use it

Every employee is allowed to invest into a 457 (b) Government plan, not just the big boys.

2. There is a $5,500 catch up bonus

If you are over the age of 50 you may contribute an additional $5,500 into the plan every year bringing your maximum contribution limit $22,000 for 2010.

457 (f)

A 457 (f) plan can be used by Government and 501 (c) organizations; it is the most generous of all the 457 account plans when it comes to contributions. Anyone who holds a 457 (f) plan can invest an unlimited amount of money into the plan each and every year until retirement.

All of that money will also get the same tax advantage as other plans. But there is a flip side to it.

In order for you to be able to defer an unlimited amount of money into the plan it must have a “risk of Forfeiture” This means that the money is the Companies until a specific point in time and there is a possibility that you will lose the money.

There has to be a specific incident associated with the plan, that will lead to you losing the account. For example, if you leave the company before a specific time you Forfeit all money in your 457 (f) plan. Each plan may have a different, “risk of Forfeiture” associated with it, so be sure to understand what your’s is before investing into it. It would be a shame to invest $500,000 into a plan and then lose it all because you didn’t know what you were doing.

Special Contributions for 457 Accounts

457 and 401k plans are pretty similar; however there is one big advantage that comes with all 457 (b) plans.

If you have missed opportunities to contribute the maximum amount into your 457 plan in the past and you are at least 50 years old, you may contribute up to an extra $16,500 a year. This means if you qualify you might be able to contribute up to $33,000 in 2010 to your plan.

Talk to a financial advisor to make that you do qualify first. Also remember, you cannot contribute the extra $5,500 catch up bonus if you take advantage of this special contribution rule, your max contribution cannot go over $33,000 for 2010.

457 account rules Final Notes

Those where the 457 plan rules, if you still have questions on how a 457 account works talk to a financial advisor or get the information from the organization you work for.

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