what to do with 401 and 457 when i retire

When saving for retirement, your employer may requite you a hand by offering a tax-advantaged savings program. Your options might include a 401(k) plan or a 457(b) plan. Both plans allow you to contribute money towards retirement on a tax-deferred footing. While there are similarities between a 457(b) and a 401(m), there are likewise key differences to keep in mind. Those variations tin can bear upon how a programme volition work for you and your retirement.

What Is a 457(b) Plan and How Does It Work?

A 457(b) plan is a non-qualified, deferred compensation plan. It typically is offered to state and local government employees, likewise as employees of certain tax-exempt organizations. The kinds of employees who may have access to a 457(b) through their employer include:

• Teachers (public school)
• Law enforcement officers
• Firefighters and emergency services workers
• City and county employees
• State, county and local government officials

In terms of how a 457(b) plan works, information technology'south very similar to a 401(k) when information technology comes to who makes contributions, how much they tin can contribute and the tax treatment of those contributions. For 2022, workers with a 457(b) plan can contribute upwards to $twenty,500 to their account through elective salary deferrals. Workers historic period 50 or older tin add together $6,500 in catch-up contributions, bringing the total annual contribution to $27,000.

This money grows tax-deferred meaning no taxes are owed on investment earnings until coin is withdrawn. An employer can designate a 457(b) account as a Roth account with after-tax contributions. Those contributions wouldn't be deductible from taxable income, the manner they would with a traditional 457(b). But employees would do good from tax-free distributions in retirement.

Special Rules for 457(b) Plans

Two attributes make these accounts different from 401(one thousand) plans. First, employer matching contributions are typically less common with 457(b) plans. If an employer makes a matching contribution, those contributions plus the employee'due south can't exceed the total almanac contribution limit. If your employer contributes $v,000 to your program for 2022, your contribution limit is $15,500 for the year. That only changes if y'all're 50 or older.

As well, 457(b) accounts let for special catch-up contributions for workers 3 years away from normal retirement age. Those employees can contribute the lesser of:

• Twice the annual contribution limit (which would exist $41,000 full for 2022)
• The regular annual limit plus the amount of the annual contribution limit not used in prior years. The latter is allowed but if the employee isn't using the standard fifty-or-older take hold of-up contributions.

What Is a 401(m) Plan and How Does Information technology Work?

A 401(k) is the most popular blazon of qualified retirement plan offered by employers. Whatsoever company tin offer one of these plans to their employees, including government and non-authorities organizations. The annual contribution limits for 401(k) plans are identical to those allowed for 457(b) plans.

However, it's more than mutual for employers to make matching contributions to these accounts. With a 401(grand) friction match, the employer can determine what percentage of employees' income to match. They're not restricted by the annual contribution limit.

A traditional 401(thou) grows revenue enhancement-deferred, with withdrawals taxed at your ordinary tax rate in retirement. Some employers offering a Roth 401(k) option. The biggest catch of 401(one thousand) plans is a x% penalty for early withdrawals, on superlative of regular income revenue enhancement.

Your programme may allow for loans, and the limits for borrowing are the same as 457(b) plans. With either plan, failure to repay the loan in full means the corporeality becomes a taxable distribution. The difference is that if you're under age 59.5 at the fourth dimension of the distribution, you'd only pay the 10% early withdrawal penalisation if the money comes from your 401(one thousand).

Pros and Cons of Saving In a 457(b)

Ane of the main advantages of saving in this blazon of account is that it'due south a not-qualified plan. This means that it'due south non subject to the aforementioned withdrawal rules equally a 401(k).

They aren't technically retirement plans and don't come with early withdrawals penalties. In other words, you can take coin from your account at any time. Withdrawals prior to or after retirement don't trigger a penalization based on age. You would, however, pay regular income taxation on those withdrawals, unless you take a designated Roth account. That ways more flexibility if yous need money for an emergency, to pay for college expenses or to buy a home.

You lot can make a withdrawal and pay taxes on the corporeality withdrawn or avert paying taxes by taking a loan instead, if your plan ambassador allows it. Assuming you're eligible to borrow from your 457(b) plan, you'd be able to take the lesser of $l,000 or 50% of your vested business relationship balance. You lot'd then repay that money, with interest, typically over a v-year period. Notwithstanding, yous may be able to extend repayment longer if you're using the money to buy a home.

Conversely, 457(b) plans may charge higher authoritative and management fees than other types of workplace retirement plans. Yous may have a more limited range of investment options to choose from within the program also. That could exist a challenge to your diversification strategy.

Pros and Cons of 401(k) Plans

These plans allow more leeway when it comes to employer matching contributions. That's keen if you're funneling a big chunk of your income into your account each year. A 401(grand) may also behave fewer fees compared to a 457(b) program, and accept a wider range of investments to choose from.

Some drawbacks to 401(k)s include the fees and investment choices linked to private plans. Some plans, for instance, may accuse more in authoritative fees and cut into returns. Or, your plan may not offer the investments you're interested in adding to your portfolio.

457(b) vs. 401(k)

It's possible that you may have access to a 457(b) and a 401(yard). The IRS says it'southward okay to contribute to both at the same time.

Since retirement plans typically have contribution limits, contributing to a different plan can double your tax deferral.

Simply in which club should you lot fund your accounts? If yous're under 59.5, and then it might make sense to max out your almanac 457(b) contribution kickoff. That way, if you lot need to withdraw money for any reason, you could tap into that account without triggering an early withdrawal penalty. On the other mitt, if you lot're over age 59.5, you may want to fund the business relationship that offers the highest employer matching contribution first to take advantage of that gratuitous coin.

Lesser Line

Both a 457(b) and a 401(k) can help yous grow retirement savings for the long term. Understanding how both plans work tin can help you make the almost of your contributions during your working years.

Meanwhile, government employees may exist able to double up their savings. It all depends whether or not an employer includes both plans every bit retirement savings options.

Retirement Savings Tips

• If yous're still weighing 457(b) vs. 401(k), you may want assist from a financial counselor. Finding the right financial advisor that fits your needs doesn't have to be hard. SmartAsset'south free tool matches you with financial advisors in your surface area in five minutes. If you're set up to exist matched with local advisors that will aid you achieve your fiscal goals, become started now.
• When planning for retirement, remember to consider every source of income you lot may have in your later years. And don't underestimate those amounts. If y'all're counting on Social Security, for example, familiarize yourself with the anticipated do good amount. Yous tin utilise SmartAsset's Social Security calculator to run the numbers on your future benefits.

Photograph credit: ©iStock.com/chrupka, ©iStock.com/kate_sept2004, ©iStock.com/iamnoonmai

Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing most personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She's worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and Globe Report, CreditCards.com and Investopedia. Rebecca is a graduate of the Academy of South Carolina and she likewise attended Charleston Southern University as a graduate student. Originally from cardinal Virginia, she now lives on the North Carolina coast along with her two children.

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Source: https://smartasset.com/retirement/457-vs-401k

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