How Much Can I Contribute to My 457b Plan?
Understand the contribution limits, catch-up options, and tax implications of your 457(b) plan to maximize your retirement savings effectively.
Saving for retirement through a 457(b) plan can be a smart strategy for employees of state and local governments or certain tax-exempt organizations. These plans offer tax advantages that help participants grow their savings efficiently. Understanding contribution limits is essential to making the most of this opportunity.
Contribution Amounts
In 2024, the contribution limit for a 457(b) plan is $23,000. Participants can defer this amount from their salary on a pre-tax or Roth basis, depending on the plan’s options. Unlike 401(k) and 403(b) plans, 457(b) contributions do not count toward those plans’ limits, allowing individuals with access to multiple plans to save more overall.
A key advantage of a 457(b) plan is withdrawal flexibility. While traditional IRAs and 401(k) plans impose a 10% penalty for withdrawals before age 59½, 457(b) funds can be accessed without penalty upon separation from employment, regardless of age. This makes the plan useful for those who may retire early or need access to funds before reaching traditional retirement age.
Catch-Up Elections
457(b) plans offer two catch-up provisions. The first allows individuals aged 50 or older to contribute an additional $7,500 in 2024, raising their total limit to $30,500. This helps those who started saving later or want to maximize tax-deferred growth as they approach retirement.
The second is the special three-year catch-up provision, which allows employees within three years of their plan’s normal retirement age to contribute up to twice the standard limit, or $46,000 in 2024. This option is available only to those who did not fully utilize their contribution limits in previous years. Eligibility requires reviewing past contributions, so working with a plan administrator is essential.
Coordination with Other Plans
Employees with access to both a 457(b) and a 401(k) or 403(b) can contribute the full annual limit to each, effectively doubling their tax-advantaged retirement savings. This is particularly beneficial for those working multiple jobs within government or nonprofit sectors.
Employer matching contributions are another factor. Some employers offer matching funds for 401(k) or 403(b) plans but not for 457(b) accounts. In these cases, prioritizing contributions to the plan with matching funds ensures employees maximize their employer’s contributions before directing additional savings into a 457(b). Investment options also vary between plans, with some offering lower-cost index funds or unique asset classes that may influence allocation decisions.
Tax Considerations
Choosing between pre-tax and Roth contributions in a 457(b) plan has long-term tax implications. Pre-tax contributions reduce current taxable income, which can lower adjusted gross income (AGI) and affect eligibility for deductions, credits, and Medicare premiums. However, withdrawals in retirement are taxed as ordinary income, meaning higher future tax rates could reduce savings more than expected.
Roth contributions, made with after-tax dollars, do not provide an immediate tax benefit but allow for tax-free withdrawals if certain conditions are met, such as the five-year rule and reaching age 59½.
State tax treatment of 457(b) distributions varies. Some states, like Illinois and Pennsylvania, do not tax qualified distributions from government-sponsored plans, while others, such as California, tax them as ordinary income. Those planning to relocate in retirement should consider how their new state’s tax laws may affect their net income.