How to Decide When to Enroll in Your Government 457 plan

Chris Reddick |

Many state and local governments have an option for their employees to enroll in a 457-defined contribution plan. This is similar to a 401(k) or 403(b) plan. You can contribute up to $20,500 of your salary into a 457 plan in 2022 if you are under 50. In most state governments, especially in Texas, 401(k) or 403(b) is the default method of saving for retirement if you don’t participate in a state pension.

In many state governments, you are typically given an option to enroll in a 457 pre-tax or Roth (after tax). Unfortunately, most government workers are unaware of the 457 plan or save for retirement only in their current plan using the default amount of a fixed percentage of their salary. Note that 457 plans are not available in the private sector. This is a unique retirement plan that enables you to save additional money for retirement.

As a government worker, you could potentially save additional money in the 457 plan for retirement. What is entirely different is that you can only max out your 401(k) and 403(b) at $20,500 under 50 in 2022. But if you have contributed $20,500, you can do an additional $20,500 in a 457 plan, for a total of $41,000! Since the 457 plans and 403(b) or 401(k) plans are not aggregated.

In addition, you can also do a Roth version of the 457 plan. So if you are above the maximum for contributing to a Roth IRA, you can use the 457 for your Roth contributions. This can be good news for higher-income families that are not permitted to make a direct contribution to a Roth IRA and maybe have IRAs with, which creates the pro-rata rule and inability to contribute tax efficiently to a backdoor Roth.

Essentially, the pro rata rule is that if you have balances in traditional IRAs when you do the backdoor Roth the conversion will consist of pre and post-tax and the pre-tax will be taxed. Without a balance in a traditional IRA, one does not have to worry about the pro-rata rule. Roth 457 plan gives you the great benefit of tax-free distributions in retirement.

The major problem, as I mentioned, is that many government workers are unaware of the 457 plan or do not think they can do this with their regular retirement contributions. Another drawback is that these retirement plans can have limited investment options with high-priced annuities or mutual funds. You need to be very careful to go through the investment options and ensure they fit your needs. Actively managed mutual funds can have high expenses that need to be evaluated and can have a drag on your earnings. Contact me on the contact page to learn more about how the 457 plan fits your retirement goals.


*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on to avoid federal tax penalties. Individuals are encouraged to seek advice from their tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation of a specific investment or the purchase or sale of securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.

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