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457 Plans - What You Need To Know

457 plans what are they and should you

have one get this question occasionally

not a lot but not an insignificant

amount either and I so I definitely real

quick 457 times anytime I hear a 457 I

know we're dealing with someone who's

working for a non-profit or a government

entity a university in particularly

non-profit and what typically happens is

we'll just use a typical example wife

doesn't make a whole lot of money maybe

$40,000 working for a non-profit SPCA or

something like that they don't have a

retirement plan other than her ability

to contribute in a 457 typically or she

works as a an admin over at the taxing

authority for the county but she does

have a 457 plan available or even in

particularly she's a schoolteacher or a

university admin of some sort a lot of

universities will have 457 pointers

husband is the primary breadwinner maybe

he's run an electrician business or some

like that and so the kids rather house

wife hasn't really saved much money

because she wasn't working at home

taking care of the kids husband was

making more money so now she goes the

job force you making again $40,000 but

they do offer 457 plans to defer and so

now she's thinking well there's no match

here

I don't need my income so I'll defer it

to a 457 plan as opposed to because

there's no match a lot of nonprofits

don't have a match and a lot of them

doing that pensions but we don't need

the income while husband's still working

so I want to defer tax as long as I can

I'll put into a 457 plan I hear that a

lot actually what a 403 B plans come to

mind as well so nonprofits and state and

local government entities all right the

issue of the 457 is that your employer

isn't doing anything they're not going

to contribute anything it's just all on

you the nice thing about a 457 plan is

you don't have to wait till you're 59

and a half to tap into it without being

taxed at the 10% penalty so there's a

benefit there without question there's

without question benefit and if you have

a lot of money you can defer into your

457 plan and your other plans 403 B's

are 401ks as well so it gives you some

serious deferral opportunity I just

don't think it's all that's cracked up

to be

I think deferrals are way overblown

and we'll talk about here in a second so

let's go into there's a 457 plan their

IRS sanctioned tax advantage employee

you retirement plans offered by state

local public employers and some

nonprofit employers they are the among

the least common forms of defined

contribution plans defined contribution

of 401 K and a 457 plan are funded when

employees contribute through payroll

deductions I either deferring salary

these funds pass to the retirement

account without being taxed unless that

the participant opens a Roth and we talk

about that alright so as up to 2019 457

plans have an annual maximum

contribution of nineteen thousand bucks

so going back to that lady she's got

nineteen thousand dollars you can put in

there immediately her taxable income

would be reduced by nineteen thousand

bucks that makes sense because she's

deferring nineteen thousand bucks but if

she's over the age of fifty she has

another six thousand dollars she could

contribute so in this case twenty five

thousand dollars can go pre-tax not tax

free but tax deferred which mean that

forty thousand dollars of income it's

now reduced to uh was a fifteen thousand

because of catch-up contributions all

right contributions to each plan qualify

for an employee savers tax credit I got

to do a video on employers to save its

savers tax credit and you can take loans

from a 401 K or 457 plan as well as for

long K of course but they are a type of

tax advantage non qualified retirement

plans that are not covered by ERISA

and so since ERISA rules do not apply

there is no premature withdrawal penalty

to their participants which means before

the age of fifty nine and a half you are

not subject to the ten percent penalty

which is freakin awesome they are still

subject to normal income taxes of course

because as tax deferred this just means

it's literally tax deferred this is a

pretty sweet thing

they feature a double limit catch-up

provision that 401ks plans do not this

provision allows participants who are

nearing retirement to compensate for

years in which they did not contribute

to the plan but were eligible to do so

going back to the you know that lady I

was just telling you about she's working

as a nonprofit working

admin over at the university the

hospital something like that while her

husband is busy making the money now she

has the doubled ketchup limit all right

so that means they admit 457 plan

participant may be able to contribute as

much as thirty eight thousand to the

plan in one year so in this case would

wipe away any tax deferred essentially

almost all her taxable income while both

plans allow for early withdrawals the

qualifying circumstances of an early

withdrawal eligibility are different

both plans being the 401k in the 457 457

accounts hardship distributions are

allowed after an unforeseeable emergency

which must be specifically laid out in

the plans language both 457 plans which

are government and nonprofit 457 plans

allow for independent contractors to

participate 1099 please but I 1099

employees are not eligible to

participate in 401 k plans all right but

here's the interesting since 457 plans

are not qualified retirement plan

subject to ERISA it is possible to

contribute to both a 401 K and a 457 at

the same time many large employers offer

both plans in such cases that joint

participant is able to contribute the

max amount to both that means you can

fully fund your 401 K and your 457 it

sounds good but is that 401 k plans and

457 plans are both tax advantage 457

plans are offered by state and local

governments and some nonprofits the two

plans are very similar but because 457

plans are not covered by ERISA there are

some aspects that are treated

differently and particularly there early

withdrawals in the catch-up

contributions that you can make that's

pretty significant and the fact that you

can contribute to both Maxo you could

put a lot of flip the money into both

these guys that's $50,000 if you're over

the age of 50 mo mu'min cfa CPA says

both plans allow employees to save money

for retirement by deducting from pre-tax

income that employees contribute to the

plan which is then taxed and invested

attacks only upon withdrawal all right

but she says at which point the ordinary

I'm tax rate is applied since we have no

active earnings in retirement our

ordinary income tax rate is generally

very low compared to a much higher rate

when we were still far other workforce

accordingly the tax deferral associated

with a 401 K and 457 can be meaningful

tax savings today the key difference

between the two pertains to distribution

rules we are tompa alright so see 401 k

plans at 10% but only at okay so

basically what was happening here should

you do a 457 plan if your tax bracket is

way up here alright and you are pretty

convinced it's gonna be way down here

yes absolutely

but don't be convinced as to be way down

near solely because you're not making

money I mean you have to look at the

other aspects of the tax code which are

distributions there at hundred percent

tax well as ordinary income from your

457 and from your 401k or 403b or if you

have a pension I mean just you can't

like our lady there mm woman who said

look we don't have any active income

well that does mean I mean that if you

have qualified distributions or not

qualified this piece you've got

distributions from from deferred

accounts that is active Bank it's not

you're not earning capacitive you got

paid tax on that very first penny have

you got a pension you got pay tax

library first penny if you're a

secondary side hustle building put decks

on old people's homes or something like

that you gotta pay tax on let's see he

said I'm saying on top of the Social

Security that's gonna come down for you

too so I just I think the deferral stuff

is way overblown I think a lot of people

get suckered into the idea well I can

defer I'm gonna do another video here in

just a few minutes on a guy who's making

thirty six thousand a year and he's

trying to further every single penny I

said I just don't get it I don't I'm

gonna do a video on that but don't get

too caught up in the deferrals of 457 s

to recognize that there is a wall you

gotta climb later on which is the the

unforeseen consequence of significant

distribution amounts all right you're

gonna take significant distribution

amounts and if you roll your 457 over to

an IRA which you certainly can do and

your 401 K you're still have our MDS and

we have required distributions no one's

getting no get around those things no

get

about distributions on a qualified

account or tax deferred account should

say in terms of the amount of tax you

have to pay on the very first penny as

ordinary income and so I I just yeah

I'd say probably ten percent which is

why university employees a lot of times

these professors for instance I've

consulting work on top of the

professorship the 457 plan at that point

might be a good idea because he can

defer a lot of money on top of the 401 K

or whatever they offer through the

university but I think that's few and

far between for the vast majority people

I just I don't see a huge benefit of it

because I think the tax deferral are way

overblown but that way something to

think about for sure

I mean don't just take my word for you

got to look at Joe and 1040 and see

where is the tax situation you have now

if you're in the twelve percent tax

bracket I'm gonna do a 457 if you're if

you are in a 22 percent tax bracket in

the 457 contributions can put you in a

twelve percent tax bracket that's

different but if you only in the twelve

is a tax bracket I just don't see the

benefit of it that's just my opinion

I'll let you decide it on your own we'll

see you next time