Author: Natalie Pine
As a university professor or administrator, you enjoy benefits not seen in other sectors. In addition to being able to maximize your typical 403b retirement plan, did you know you have access to additional tax-advantaged accounts? A 457 account is one such example.
How does a 457 Retirement Plan differ from other plans?
A 457 account, also referred to as a deferred compensation plan, unlike a typical 401k or 403b account is “at risk”. This means if the business or in this case university goes out of business, you lose the money contributed to a 457.
So, why would I be interested in contributing to one of these plans? First, a university tends to be a very stable institution with funding from states and even private endowments. Second and most importantly, 457s allow you to defer an extra $20,500 or more to tax advantaged accounts. In some cases, you can even use a “super catch up” and defer even more.
The “Super Catch Up” contribution period
Some 457 plans may allow you to put additional money aside (the “Super Catch Up”) starting three years before the normal retirement age (which is defined in each plan). This feature is referred to as the Three Year Rule.
Here’s how it works. During those three years, you can contribute double the standard contribution limit, or the total of the current year’s ceiling plus unused portions from prior years, whichever is less. For example, in 2022, the allowable contribution would be $41,000 (which is double the standard contribution limit). If you didn’t max out prior-year contributions, you could contribute $20,500 plus previous unused contribution amounts.
Please note that this latter option is only available to those not using the over 50 catch-up contributions.¹
Less Tax on Early Withdrawals
Another unique aspect of 457 plans can benefit you if you retire before age 59 ½. With 457 plans, there’s no 10% penalty like the 401(k) has for withdrawals before retirement age.
Rollovers of 457 Balance
One last unique element only available to 457s at universities is you are able to rollover your entire balance in a 457 into a Roth IRA, if the balance is Roth, or an IRA at separation from service. In the private sector, these deferred compensation plans must be distributed to the individual over a short period of time at retirement and often increase taxes significantly until they are fully distributed.
Aside from these benefits, these plans have a few negatives to be aware of.
Pre-Retirement Withdrawals are Limited
457 balances are only available to the participant when they separate from service unless a hardship distribution is requested, and then they are only allowed in extreme emergency circumstances. Note that this means you could be retired but not completely separated from service, and thus you would not have access to rollover or distribute these funds without a hardship.
Some 457 plans do allow loans. These would need to be repaid within five years and require quarterly or more frequent payments. The amount you can take is limited to the lesser of 50% of the account balance or $50,000.
As you can see, the 457 is yet another tool that can help you save more for retirement. Just keep in mind that you should make the most of the 457 and other university benefits sooner rather than later for the best results.