I work for a government organization. Traditionally, we’re known as the workforce that’s underpaid, but which has great benefits… so it sort of makes up for it. At least, that’s what they say.
Although I don’t entirely agree on both fronts, recently I discovered a new financial trick-of-the trade that’s only available to those who work in government organizations and certain nonprofits — like hospitals, charities, and unions. The 457(b) plan is an employee-sponsored, tax-favored retirement savings account that acts much like a 401(k) or 403(b) for government workers, but is even more attractive. Here’s why:
Tax Free Contributions & Lowering Taxable Income
- Contributions for the 457(b) plan are taken from your paycheck on a pre-tax basis. Much like a 401(k) or 403(b), the contributions are invested in an array of mutual funds that you can choose from, depending on your risk tolerance.
- Contributions to the 457(b) lower your taxable income, which helps tremendously if you’re on the Public Service Loan Forgiveness (PSLF) Program or the Teacher’s Loan Forgivness (TLF) Program or any other foregiveness program that calculates your payment based on your net income. Even if you’re not using one of these loan forgiveness programs, lowering the amount you pay in taxes every year keeps real money in your hands, because who wants to pay more to the government than you have to?! The interest and earnings from your 457(b) contributions are not taxed until you withdraw the funds at retirement.
Higher Retirement Contribution Ceilings
- You can contribute as much as $18,500 towards the plan in 2018. If you are age 50 or older, your limit increases by an additional $6,000 by what’s called a catch-up contribution. Some employers offer an even better catch-up contribution deal as you reach close to retirement age. Ask your employer for specific details on their catch-up contribution policies.
- And here’s my favorite benefit… the 457(b) plan contributions and limits are in addition to other 401(k) and 403(b) plans. In other words, you can contribute a maximum of $18,500 towards the 457(b) plan and it does not affect how much you can contribute to the 401(k) or 403(b) plan. If your employer offers a 457(b) and a 401(k) or 403(b) plan, you can contribute the maximum amount to both plans. So your new annual tax deferral limit is $37,000 ($18,500 + $18,500) rather than the typical $18,500 limit seen in a traditional 401(k). That’s a HUGE advantage if you’re trying to retire early, retire with as much money as possible, or seeking financial independence.
- Employers also have the option of matching the amount you contribute to a 457(b) plan or providing some type of percentage towards the plan. My employer, for example, contributes 1% of the employees salary if the employee is contributing 3% or more. I can’t say this enough…TAKE ADVANTAGE of anything your employer offers you. It’s a gift! Literally! The 1% is on top of the $18,500 limit for the employee — so there is no repercussion on your annual limit and you can contribute up to the standard $18,500 limit every year regardless.
Tax Deferred Savings Plan — with NO Penalty
Another HUGE advantage to the 457(b) plan is that it’s basically a tax deferred savings plan. Normally, the IRS penalizes individuals who take funds out of a 401(k) or 403(b) plan — so much so, that they charge you for it. There’s a 10% fee for any funds you withdraw before the age of 59.5. This 10% fee is on top of the taxes you have to pay to withdraw as well, because when you withdraw, the funds are considered income and are taxed accordingly. However with a 457(b) there is no 10% charge if you leave the job with whom you have the 457(b) with. So if you don’t plan on staying at your current workplace forever, you could think of it as income you’re saving (and growing) without having to pay taxes up front.
So here’s my recommendation…DO IT! Contribute to a 457(b), max out, even. You won’t miss the money as much as you think you will. Working for a government organization doesn’t have very many advantages, but this is a real one.
If you need help estimating how much of an affect contributing to a 457(b) plan or a 401(k) or (403)b plan, feel free to email me at firstname.lastname@example.org