If you work in state or local government, are a high-ranking member of a union, or a highly compensated corporate executive, you may have the opportunity to save for retirement in a work-based 457(b) plan. Similar to a 401(k), the rules for a 457(b) plan differ slightly—to the benefit of those who have a 457(b).2014 Contribution Limits for 457(b)Plans
Just as with 401(k)s, you can generally contribute up to $17,500 in 2014. The number is unchanged from 2013. People who are age 50 1/2 or older can contribute even more: up to $23,000 in 2014. That's an additional $5,500 in catch-up contributions.
If you are nearing retirement, you can add even more in catch-up contributions to your 457(b). For three years before you retire, you may qualify to contribute double the annual contribution limit. That's a potential contribution of $35,000 in 2014. If you have an employer matching incentive, your total contribution could be even greater. The amount you put into your 457(b), however, can not be more than 100% of your salary.
457(b) Plan Basics
If you aren't sure how a 457(b) works, it's kind of like a 401(k). Offered through your employer, it's what is known as a deferred compensation plan. You contribute regularly through your paycheck, on a pre-tax basis. That means that by contributing you are lowering your taxable income. The money you contribute is invested and those investments are not taxed until the funds are withdrawn at retirement. Here's another big difference with a 457(b) plan: if you have a 401(k) and withdraw funds before the retirement age of 59 1/2, you will likely pay taxes plus a 10% penalty; with a 457(b) plan, you do not pay the 10% penalty fee. Not that you would want to take the money out early, but in a pinch it's a nice option to have.
Even if you already have a 401(k) or 403(b), you can have a 457(b) plan too. And you can contribute the maximum amount to each in 2014. Why would you maximize your contributions? Because they are made pre-tax, they grow tax-deferred until retirement. That means you could rack up some huge potential savings by contributing to one or more retirement plans. So if you have the chance to contribute to a 457(b), while you have a chance to do so, don't miss out on the opportunity.
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