457(b) Accounts - The Basics
457(b) accounts are very similar in function to 403(b) and 401(a) accounts and are only available to certain local or state government and certain non-profit employees. Generally, they are utilized by districts less frequently than 403(b) and 401(a) accounts. Savings in 457(b)s are deducted pre-tax from your paycheck and invested in your account on a tax-advantaged basis, meaning no taxes are paid on the growth. Instead, the money is taxed as income when it is withdrawn in retirement at which point you can use the money as you see fit.
Districts are able to be very specific in the design of their 457(b) plans, giving them control over the provider, investment choices, vesting schedule, forfeitures, and other stipulations. In terms of control, 457(b) plans do not leave much to the individual participants and their accounts are held in trust by the plan for their benefit, rather than being their direct property like 403(b) accounts.
Many districts utilize these plans as a way for teachers to have a choice in the retirement plan they want to contribute to and as a vehicle to further supplement their savings above and beyond what they’re limited to contributing to their other retirement accounts. 457(b)s also give districts the ability to provide matches and non-discretionary contributions, providing them a way to utilize the accounts as an incentive that can be tailored to the different compensation arrangements they offer to teachers and other district employees. There are several planning advantages to having access to a 457(b) account that you should be aware of that can be very valuable to you, so they’re typically always a good option to at least explore.
On Tuesday, we'll cover tips for 457(b) accounts, but for now you can learn more by reading these articles:
Have more questions? No problem, we'd love to hear from you and provide you with answers!
Mychal Eagleson, CFP®, ChSNC®, AAMS® is the President of An Exceptional Life Financial, a firm that specializes in financial planning for teachers and families with special needs. He frequently writes and speaks on personal finance topics relating to these clients. Mychal also serves on the board of the Financial Planning Association of Greater Indiana as the Director of Public Relations & Social Media. To read more of his articles and learn about An Exceptional Life Financial please visit: www.anexceptionallifefinancial.com.