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Cents and Sensibility Guy Steele |
Make sure you
know what your
retirement plan offersIf you work for a state or local government you may be able to contribute to a retirement account know as a 457(b) plan. If you have such a plan, consider yourself fortunate, because it's a great way to help build assets for retirement. But 457(b) plan provisions can vary between plans, so you'll want to know exactly what your plan offers -- and how you can take full advantage of it.
All 457(b) plans offer some key tax advantages to participants. Your earnings grow tax-deferred, which means your money will accumulate faster than in would if it were placed in an investment on which you pay taxes every year. Plus, you typically make "pre-tax" contributions to a 457(b) plan, so your adjusted gross income will be reduced. Also, you typically have a choice of several different types of investments with which to fund your 457(b) plan.
But beyond these basic similarities, there are some important variations between the plans -- and you might need to know these differences, because some employers can offer a 457(b) plan -- plus a 403(b).
If you are offered a 403(b) along with your 457(b) plan, you have some interesting options. You could split your contributions between the plans -- or, if you can afford it, you could put in the maximum to both plans. If you choose to participate in both plans, you could gain some plan-specific advantages. For example, a 403(b) plan provides less restrictive hardship withdrawal provisions, while a 457(b) plan allows you to make penalty-free withdrawals from your account after you leave your job and before you turn 59 1/2. (These penalty-free withdrawals do not apply to amounts you may have rolled over to your 457(b) from other plans.)
It's nice to have a choice of retirement plans -- but even if you just have a 457(b) plan, you can benefit from some attractive new features, thanks to new tax laws. Consider the following:
"Catch-up" contributions -- If you have a governmental 457(b) plan, and you're 50 or over, you can now make "catch-up" contributions that allow you to exceed the normal pre-tax contribution limit. In 2003, that limit is $12,000, along with a $2,000 "catch-up" contribution, for a total of $14,000. Both the normal contribution limit and the catch-up limit will increase every year until 2006.
Portability -- Your governmental 457(b) plan is now more "portable" -- so you can pretty much take it with you wherever you go. You can now "roll over" your plan's assets to an IRA or to your new employer's tax-qualified plan, such as a 401(k) or a 403(b).
There are other types of 457(b) plans. State and local governments may offer a 457(b) to all employees, while tax-exempt organizations might offer a different 457(b) to upper management and highly-compensated employees. To complicate matters, both types of employers can offer a 457(f) plan -- sometimes called a "top-hat" plan -- to top-level employees. The pre-tax contribution limit is the same for both types of 457(b) plans. However, if you work for a tax-exempt group, rather than the government, your 457(b) plan does not offer the "catch-up" provision, or the rollover provision.
If you have questions about your 457 plan, contact your plan administrator or your tax adviser. Learn as much as you can about your plan -- and then put it to work on your behalf.
See the Columnists section for some past articles.
Guy Steele is a financial planner and head of the Pali Palms office of Edward Jones. Send planning and investing questions to him at 970 N. Kalaheo Ave., Suite C-210, Kailua, Hawaii, 96734, or call 254-0688
