Employees of state and local governments can stash more money in their 457 plans this year, building bigger nest eggs for retirement.
457 Contribution Limits for 2019
The maximum amount you can contribute to a 457 retirement plan in 2019 rose by $500 to $19,000, including any employer contributions. For example, if your employer contributes $1,000 for 2019, you are allowed to contribute $18,000 to meet the annual limit. That said, most plans don’t match worker contributions.
If you’re 50 or older, your plan may allow you to contribute an additional $6,000 as a catch-up contribution, bringing your contribution total to $25,000. There’s also a separate catch-up contribution that benefits soon-to-be retirees, if permitted by the 457 plan. If you’re within three years of the plan’s “normal retirement age,” you can save double the annual limit for three years as long as you haven’t maxed out your contributions in the past. If you’re eligible, that brings your maximum contribution level to $38,000 for 2019–or up to $114,000 over three years.
However, if you are eligible for both types of catch-up contributions, the IRS will only allow you to take advantage of the one that adds the most to your retirement account.
Benefits of a 457 Retirement Plan
As with contributions to a traditional 401(k) or contributions to a 403(b), money goes into a 457 before you pay income taxes on it. The pretax contributions lower your current taxable income. Meanwhile, your contributions and earnings grow tax-sheltered until you withdraw them. Unlike with the other retirement accounts, the IRS does not penalize you for taking early withdrawals from a 457 account before age 59 1/2. But you will pay regular income tax on all withdrawals.
“Some public employees, like firefighters and police officers, retire before age 59 1/2 because they started working in their early twenties and retire 20 or 25 years later in their late forties or mid fifties,” says David Tanguay, senior vice president of client services at ICMA-RC, a not-for-profit financial services firm that manages and administers 457 plans.
“A 457 can serve as bridge until a participant is eligible to receive his or her pension or Social Security benefits,” he adds.
Many 401(k) plans in the private sector automatically enroll workers. But 457 plans generally do not permit auto-enrollment because of state or local laws. So the first step in benefiting from this retirement vehicle is to sign up.
Best Investments for a 457 Plan
Then, do your due diligence on your investment options. Fees and other costs are always important when evaluating investments.
More 457 plans are adding target-date mutual funds that take a lot of the investment decision-making out of workers’ hands. With target-date funds, a worker chooses the fund whose name includes the year closest to his or her expected retirement date. So in 2019, a worker planning to retire in about 20 years would select a target-date fund with 2040 in its name. (Target-date funds typically are named in five-year increments: 2030, 2035, 2040 and so on.) These funds invest aggressively when workers are young and gradually become more conservative as retirement approaches.
For example, a target-date fund meant for workers in their twenties holds mostly stocks. But investments in a target-date fund for someone nearing retirement age may be split evenly between stocks and bonds.
Today, target-date funds are gaining popularity over other investments in 457 plans, says John Saeli, vice president of market strategy and government affairs at ICMA-RC.
Besides target-date funds, 457 plans generally offer a lineup of index funds, actively managed stock mutual funds and fixed-income funds. They also offer managed accounts, which are professionally managed to match your financial goals and risk tolerance.
If you’re happy with your investment choices, the next step to boost your retirement savings is to increase your contributions as your salary increases. Unlike 401(k) plans with auto-escalation, it’s not an automatic feature with 457 plans. Therefore, it is up to you to beef up your contributions when you get a pay raise or can afford to contribute more.
Remember, this is a supplemental plan to your traditional pension, and even though you may not get a match, your employer has already put aside a large sum of money on your behalf.