How is a 457 b plan taxed
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
