Section 457 Deferred Compensation Plan
Key Takeaways
– A section 457 deferred compensation plan may allow penalty-free withdrawals before age 59½
– Early IRA or 401(k) withdrawals (prior to age 59 1/2) usually trigger a 10% tax penalty
– A large section 457 deferred compensation plan may often have low investment expenses
– Rolling a 457 into an IRA too early might eliminate a major tax advantage
Section 457 Deferred Compensation Plan – Links
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Section 457 Deferred Compensation Plan – Transcript
Section 457 Deferred Compensation Plan Transcript
This is episode 457, and I want to use this opportunity to talk about Section 457 Deferred Compensation plans.
These are retirement plans (*usually) for municipal organizations.
For all practical matters, 457 plans look, act, smell, appear like 401k plans – in the sense that you put money in as a participant on a pre-tax basis (*or on a post-tax Roth basis).
There is no company match because you work for a municipal organization, like a hospital — or you’re a police officer or some kind of organization like that.
So the one large difference that you need to know is that participants in 457 plans have a very favorable tax break that you don’t find in a 401k or in an IRA.
(That is) if you take money out of a 401k plan — or an IRA account — before age 59 and 1/2, of course the money is going to be taxable income to you… but you also get layered on top of that, a 10% tax penalty on top of that.
A 457 plan does not carry that 10% penalty.
That’s actually pretty favorable for a participant.
Imagine, you know, for instance, a police officer who works 20 years on the job …or 25 years on the job, and they’re retiring at 48, 51, 53 years old. If they were in a 401k plan, or had money in an IRA, if they try to take money out of that, not only is it going to be taxable income, but they’d have a 10% penalty on top of that.
A lot of police officers retire at those kind of ages after 20 or 25 years. Now, hey can tap into this money right away. They know, or they should know, it’s going to be taxable income – just as if they earned it.
But there is no 10% penalty.
That’s a huge, huge tax break.
If you know someone who is a participant in a 457 plan, tell them they should watch this video… and they should be encouraged to keep that money in their 457 plan (until at least age 59 1/2).
The 457 plans are, for, larger organizations, are a pretty effective way to have this money compound at a very low cost.
Some of these plans are huge, like the New York State Deferred Compensation Plan.
That is the single largest deferred compensation plan – at the present time – it’s the largest deferred compensation plan in the United States.
I can tell you that plan has some of the lowest expenses I’ve ever seen for a workplace retirement plan.
But yet people every day, retire before 59 and 1/2, and they roll this money into an IRA.
I just don’t understand how that makes economic sense for someone like that. They are giving away a huge tax break.
So, with episode number 457, I wanted to talk about 457 plans deferred compensation plans.
Thanks for watching this episode, Section 457 Deferred Compensation Plan.
