If you’re a state or local government employee, you’re probably eligible for a 457 retirement plan. So how does it compare to a Roth IRA?
What Is a 457?
While most employees will have access to a 401(k) plan through their employer, some businesses and organizations have other types of retirement plans. Nonprofits can offer a 403(b), while government entities provide a 457. All three of these plans can be used by different kinds of organizations in most cases. At their core, they offer much of the same tax advantages.
- A 457 – or a 457(b), as it’s often called – is tax advantaged. Your contributions are pretax, so you’re not paying taxes on the money you put into the plan until you withdraw it later in life. In general you can contribute up to $18,000 in 2017, and if you’re 50 or older you qualify for catch-up contributions, increasing your annual limit to $24,000. That is the same as a 401(k).
- But unlike the 401(k) or 403(b), the 457 allows employers to add another $12,000 to that catch-up contribution three years before retirement. This means that if your plan specifies 65 as your retirement age, once you reach the age of 62 you can contribute up to $36,000, providing that’s not higher than your annual salary.
- As with a 401(k), employers often match your 457 contributions. If you invested $1,000 per month and your employer matches at 50 percent, you’re getting $500 of free money.
It’s Not Either / Or
Another big advantage to the 457 plan is that it works so well with other plans. Some nonprofits offer a 457 and a 403(b) because an employee can contribute $18,000 to each, for a total of $36,000 annually. The same is true with Roth IRAs, which are a different type of retirement account. However, you wouldn’t pick either a Roth or a 457; ideally, you would have both.
Here’s the beauty of the 457 plan: it offers you the opportunity to supplement your Roth IRA in the same way that 401(k) and 403(b) plans do. You can contribute the maximum to your Roth IRA ($5,500 annually; or $6,500 if you’re age 50 or older). On top of that, you can also contribute the maximum to your 457 plan: $18,000 annually; or $24,000 if you’re 50 or over. Employer-sponsored 401(k) or 403(b) plans have the same contribution limits as 457 plans. So whether you have a 457, 401(k) or 403(b), you could, between your Roth IRA and your employer-sponsored plan, potentially save a grand total of $23,500 toward retirement each year if you’re under age 50 – or $30,500 if you’re 50 or over.
Because you have to pay taxes on your Roth IRA contributions at the time of deposit (which means that you don’t pay taxes when you later withdraw the funds), having two types of retirement accounts can serve as a hedge – protection against the unknowns of the future. If tax rates are astronomically higher when you retire, you got a great deal on your Roth IRA. If they’re lower, your 457 will be the more tax-efficient account. Either way, one will help to balance out the other – a hedge in the investing world.
Roth IRA in a 457
What if you want the advantage of a Roth IRA inside of your 457? Some employers offer a Roth option. If available, you can designate all or a portion of your contributions to be after-tax contributions that you later withdraw tax free.
It might still be a good idea to have a separate Roth IRA account so you can save even more. If you’re behind on contributions, the separate Roth gives you a higher maximum for the year.