Are You Confused About Your Deferred Compensation or 457(b) Options?

If you are, then you are certainly not alone.

If you have never heard about the Deferred Comp plans, still keep reading.

Even though they are not as popular as traditional employer-provided plans such as 401(k) or 403(b), there is still a good possibility that you will encounter them at some point in your career.

1.) What are the 457(b) or Deferred Compensation Plans?

These plans are available to employees of government and non-profit companies.

The main objective is to contribute in addition to your 401(k) or 403(b) on a pre- or post-tax basis.

Your funds in a 457(b) plan grow tax-deferred and you can also avoid the 10% early withdrawal penalty.

Let’s dig a bit deeper.

2.) What are the types of Deferred Compensation Plans?

There are two types of 457(b) plans:

#1. Governmental

These plans are offered by state and local governments.

The funds in the plan are not available to the employer’s creditors. No risk of losing them.

The next point is very important. You can rollover the funds to your IRA or 403(b)/401(k) after you leave your employer.

#2. Non-Governmental

The contributions are subject to the employer’s creditors. In other words, you can lose your savings if your employer goes out of business.

Here is one of the biggest confusion points - you cannot rollover to an IRA or 403(b)/401(k) after you retire or depart from your employer.

You may be forced to take the funds out of the 457(b) after you leave your employer. They will usually give you five (5) years to do so.

In short, governmental 457(b) plans are superior in every way.

As a non-governmental 457(b) plan participant, you want to evaluate your plan options, internal expenses, and your employer’s financial position before you start contributing.

3.) What are the benefits of the Deferred Compensation Plans?

457(b) plans work very similarly to 401k and 403b plans. There are two important differences: special catch-up rules and no early withdrawal penalties.

Here are more details on each of the differences.

Within 3 years of the plan’s retirement age, the special catch-up rules allow you to contribute the lesser of:

• 2x annual contribution limit ($46,000 in 2024) or
• The annual limit plus the amount not used in prior years.

This is your chance to truly catch up on your contributions!

Most retirement accounts have a penalty if you take the funds out before age 59 1/2. The penalty is usually 10%.

Early withdrawal penalties do not apply to 457(b) plans. This can be a significant advantage for early retirees.

In short, Deferred Compensation plans can provide additional flexibility and work well in conjunction with regular employer-sponsored retirement plans.