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Contribution Limits for 457(b) Plans in 2013

How Much Can You Put Away in Your 457(b) Plan This Year?

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So you have a 457(b) plan, the employer-sponsored retirement savings account for people working in state and local government, as well as highly compensated nonprofit or union executives. A 457(b) plan works just like a 401(k) but with slightly different rules. Different rules can make a big difference. If you have a 457(b) plan, consider yourself lucky. So, how much can you put into a 457(b) plan in 2013?

457(b)Plan Contribution Limits in 2013

In a 457(b) plan, you can generally contribute as much as $17,500 in 2013. This contribution limit is up from $17,000 in 2012. If you are age 50 or older and your employer allows something called catch-up contributions, your limit increases by $5,500. That brings your total 457(b) contribution limit up to $23,000 (not even including the potential employer match, which we'll get into in a minute) in 2013.

A major difference with the 457(b) plan is that your employer may let you load up on additional catch-up contributions in the years before retirement age. In the three years before you retire, you may qualify to double your annual contribution limit—that means you could put in up to $35,000 in 2013. The only catch is the amount you put into your 457(b) can't exceed 100% of your salary.

Contribution limits rise about every year to three years with cost of living adjustments, typically in increments of $500.

How Exactly Do 457(b) Plans Work?

Like a 401(k) plan, a 457(b) plan is offered through your employer if you work in a government or nonprofit job. You make contributions as a percentage of your regular paycheck, before taxes. Those contributions are invested in mutual funds that buy stocks, bonds and sometimes even real estate. And you pay no taxes on those investments until you withdraw the money at retirement after age 59 1/2.

A 457(b) plan is a lot like a 401(k) or 403(b) plan. But the ways in which it is different are pretty sweet. The first major difference is the ability to double your contribution limit in the years before retirement. You can do some serious saving with that option. Another thing that's different: with a 401(k) or other retirement savings plan, if you need to withdraw funds before age 59 1/2, you will most likely be subject to a 10% penalty fee on top of any applicable taxes. With a 457(b) plan, you can take the money out before retirement without paying a 10% penalty fee. Now, I'm not condoning a 401(k) or 457(b) withdrawal before retirement, but it's nice to have the penalty-free option that isn't a 401k loan.

With an employer match, you can save even more in a 457(b) plan. Employers may match 50% of up to 6% of your salary. They will typically release or "vest" this money over time, to encourage your loyalty to the company. With a typical vesting schedule, you would get your full benefits after five or six years with the company, and a graded amount for every year before then.

457(b) Combinations

You can have a 457(b) plan and also have a 401(k) or 403(b). Teachers commonly have a combination of these. If you did have combination of two plans—a 457(b) and a 403(b) or a 457(b) and a 401(k)—you could contribute the maximum amount to both plans, $35,000 in 2013.

If you have access to a 457(b) plan in 2013, you should take advantage of this truly great retirement savings opportunity. To be sure, I would say that if you had a 401(k), 403(b) or pretty much any other type of retirement plan that allowed tax-deferred savings. But a 457(b) stands out with some truly unique benefits.

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