457(b) Plan

What is a 457(b) Plan?

A 457(b) plan (also deemed by the IRS as a 457(b) Deferred Compensation Plan) is a tax-advantaged, employer-sponsored, deferred-compensation plan that can be offered by state or local government organizations, or nonprofit employers. The term refers to section 457 of the Internal Revenue Code. 

First introduced in 1978, these retirement vehicles are categorized as “defined contribution plans”, and are akin to 401(k) plans. The primary difference is that this plan was specifically designed for two types of employers – government employers and some NGOs (non-governmental organizations). Eligible participants to a 457(b) plan make paycheck deductions prior to taxation to the account. Annual contributions cannot exceed up to 100% of the participant’s includable income, or $19,500 for 2020. Contributions within this type of retirement account remain tax-free until a withdrawal is made. 

Essentially, there are two variations of this sort of retirement plan: governmental and a non-governmental 457(b) which is for upper-level management and executives and as per the IRS regulations “cannot cover rank-and-file employees”.

Typically, private companies offer non-governmental 457(b) plans, thus restricting participation only to upper-level management and executives. It is important to note that investment options available with this retirement vehicle are limited to what is offered by the plan provider.

 

457(b) Plan Rollover Rules & Limitations

The IRS has stringent rollover rules that must be followed pertaining to a 457(b) plan. It is crucial to understand that only funds in a Governmental 457(b) plan are permitted to be rolled over. Non-governmental 457(b) rollovers are not allowed under any circumstance.

Funds from a Governmental 457(b) plan can be “rolled over” into another type of retirement account or between financial institutions within a period of 60 days. Failure to do so will result in taxation of the funds. 

An advantage of the Governmental 457(b) plan, is that funds are not subject to the 10% early-withdrawal penalty tax. If you are under 59 ½ years old and take a distribution, the funds will only be subject to income tax.

It is crucial to note that not all plan providers permit rollovers. Prior to embarking on a rollover, you first must ensure that this is allowed by your plan provider.

 

457(b) Plan vs. Other Retirement Accounts

The table below compares the various types of retirement plans:

Plan TypeSponsorshipRoth Option?Allows Precious Metals Stocks?Allows Precious Metals Bullion?Allows Other Alternative Investments
Precious Metals IRAIndividualYesYesYesYes
Traditional IRAIndividualYesYesNoNo
401(k)EmployerYesMaybeNoNo
SEP IRASelf-employed or Business ownerYesYesMaybeMaybe
Solo 401(k)Self-employedYesYesYesMaybe
Simple IRAEmployerYesYesMaybeMaybe
Money Purchase PlanEmployerNoMaybeNoNo
Profit Sharing PlanEmployerNoMaybeNoNo
457(b)Government or Non-governmental Tax-exempt Employer YesMaybeNoNo
SARSEPEmployerNoYesMaybeMaybe
Keogh PlanSelf-Employed or Unincorporated Employer NoMaybeNoNo
Thrift Savings Plan (TSP)Government or Armed Services EmployerYesNoNoNo
ESOPEmployerYesMaybeNoNo
AnnuityIndividualNoMaybeNoNo

Maybe” denotes where precious metals investment options are dependent upon the retirement vehicle provider.

 

457(b) Contribution Limits

The Internal Revenue Agency (IRS) has specific 457(b) plan contribution limits. For 2020, the IRS regulations stipulate that 457(b) contribution limits cannot exceed the elective deferral limit of $19,500, or “100% of the participant’s includible compensation”. In addition, if you are 50 or over and have a state or local governmental 457(b) plan, catch-up contributions can be up to $6,500 in 2020.

As per the IRS rules, “special 457(b) catch-up contributions, if permitted by the plan, allow a participant for 3 years prior to the normal retirement age (as specified in the plan) to contribute the lesser of: twice the annual limit $39,000 in 2020 and $38,000 in 2019, or the basic annual limit plus the amount of the basic limit not used in prior years (only allowed if not using age 50 or over catch-up contributions)”.

 

457(b) Calculator

A 457(b) plan can prove to be an excellent retirement investment choice because it is a tax-advantaged investment vehicle.  There are numerous components that contribute to the amount of savings you set aside for retirement. Use this 457(b) calculator to determine how much you could potentially save.

457(b) Plan Providers

Fidelity 457(b)

Fidelity has consistently been one of the highest-rated multinational financial services companies in the industry. It has proven to be an excellent option for retirement investing, thus why many workplaces choose to offer a Fidelity 457(b) plan.

Prudential 457(b)

Prudential is one of the largest financial services companies in the world. The Prudential 457(b) is one of the most popular providers of this type of retirement plan offered by workplaces throughout the United States. 

Principal 457(b)

Established in 1879, Principal Financial Group is another world-renowned financial services company. A Principal 457(b) is another popular provider of this sort of retirement plan for employers around the United States.

 

457(b) FAQ

A 457(b) plan is a tax-advantaged, employer-sponsored, deferred-compensation plan that can be offered by state or local government organizations, or nonprofit employers.

As defined by the IRS, a 403(b) plan ( also referred to as a tax-sheltered annuity or TSA plan) “is a retirement plan for certain employees of public schools, employees of certain tax-exempt organizations, and certain ministers”. A 403(b) can be either an annuity, a custodial account, or “a retirement income account set up for church employees”.

Essentially, there are two variations of this sort of retirement plan: a Governmental 457(b) plan and a non-governmental 457(b) which is for upper-level management and executives and as per the IRS regulations “cannot cover rank-and-file employees”.

Typically, private companies offer non-governmental 457(b) plans, thus restricting participation only to upper-level management and executives. It is important to note that investment options available with this retirement vehicle are limited to what is offered by the plan provider.

The IRS rules stipulate that only funds from a Governmental 457(b) plan can be rolled over.

First introduced in 1978, 457(b) plans are categorized as “defined contribution plans”, and are similar in many ways to 401(k) plans. The primary difference is that a 457(b) plan is specifically designed for two types of employers - government employers and some NGOs (non-governmental organizations).

The investment options offered through a 457(b) plan are dependent upon the plan provider. Below are the types of investments available to you with a 457(b) plan:

• Mutual funds
• Exchange-Traded Funds (ETFs)
• fixed, equity-indexed annuities
• variable annuities
• stocks
• bonds

It is crucial to note that as per IRS rules, a 457(b) plan cannot be used to invest in physical precious metals bullion. The easiest method to invest in gold, or another precious metal with a 401(k) is to buy mutual funds that include mining company stocks, or invest outright in the stocks of gold mining companies. This investment strategy is known as purchasing “paper gold.” Another avenue to explore that will provide indirect exposure to precious metals is mining ETFs and gold ETFs.

The IRS has stringent rollover rules that must be followed pertaining to a 457(b) plan. It is crucial to understand that only funds in a Governmental 457(b) plan are permitted to be rolled over. Non-governmental 457(b) rollovers are not allowed under any circumstance.

Funds from a Governmental 457(b) plan can be “rolled over” into another type of retirement account or between financial institutions within a period of 60 days. Failure to do so will result in taxation of the funds.

An advantage of the Governmental 457(b) plan, is that funds are not subject to the 10% early-withdrawal penalty tax. If you are under 59 ½ years old and take a distribution, the funds will only be subject to income tax.

It is crucial to note that not all plan providers permit rollovers. Prior to embarking on a rollover, you first must ensure that this is allowed by your plan provider.

The primary benefit of rolling your Governmental 457(b) plan into a self-directed IRA like a Precious Metals IRA, is that this type of retirement account permits a myriad of diversified assets not allowed in other retirement vehicles. In addition, a self-directed IRA is solely managed by you the investor. Although under federal law, you must have a custodian who acts as an administrator over this type of retirement vehicle.

In essence, the IRS has imposed little restrictions on what you can hold in a self-directed IRA. Unlike many other retirement accounts, a self-directed IRA can be used to invest in everything from precious metals like gold and silver, to real estate, to commodities. Akin to other IRAs, the only investments not allowed in a self-directed IRA are S corporation stock, collectibles, and insurance investments.

The Internal Revenue Agency (IRS) has stringent regulations on what types of gold and silver are permitted in an IRA. Essentially, the criteria include the purity levels of the gold or silver, and where it was minted. It is crucial to understand that only specific bullion coins and bars which meet IRA-approved purity levels are permitted in this type of retirement vehicle. Some examples of bullion coins that are approved by the IRS for investing in an IRA include American Eagles, Canadian Maple Leafs, and Austrian Philharmonic.

It is imperative to understand that the IRS does NOT permit things like collectible coins or numismatics as an IRA account. Any reputable IRA company will only recommend IRA-approved gold and silver bullion coins and bars. Be wary of any Gold IRA company that attempts to push collectible coins or numismatics as an investment option for an IRA - their intentions will be dubious.

A Gold IRA company is a firm that acts as a custodian for the entirety of the process for setting up Gold IRAs (in addition to other Precious Metals IRAs). The process entails setting up the account, an IRA rollover or custodian-to-custodian transfer, purchasing IRA-approved precious metals, and storing precious metals in an accredited IRS-approved depository. Usually, Gold IRA companies have established relationships with traditional IRA custodians, IRS-approved accredited depositories, and precious metal dealers, which makes the process seamless for clients.

It is crucial to understand that under federal law if you open a self-directed IRA (including a Precious Metals IRA), you must have a custodian.

This is solely dependent on your personal preferences. What Gold IRA company you choose is contingent on what components are most important to you, whether it is storage options, ratings, or client services, amongst other factors. Once you have decided on your personal preferences, select numerous companies, then contact them to receive more information pertaining to both the respective firm and products offered.

Sometimes any movement of money from one retirement plan to another is often referred to as a “rollover”. However, the IRS has specific definitions for a rollover and a transfer. As per the IRS definition, a rollover occurs when the funds being moved are paid to you directly, and you then deposit the money into the other retirement vehicle.

The IRS has strict regulations and rules pertaining to an IRA rollover. The guidelines outlined by the IRS for an IRA rollover include having 60 days to deposit the money you have received, in the custodian of your choice. If you are under 59 ½, failing to do so within the 60-day timeframe from initially receiving the funds, will result in a 10% early-withdrawal penalty tax being levied on said funds.

If you receive distributions from a retirement plan and you rollover into another retirement plan, as per the IRS rules there will be no taxation on those funds. In addition, funds can only be rolled over once in a 365-day period from a specific IRA.

In a trustee-to-trustee transfer (as the IRS has deemed it) you request that the original IRA custodian transfers the funds to the new IRA custodian. With a trustee-to-trustee transfer, you never touch the funds and the money transferred is not subject to taxation.

Investing in precious metals such as gold is an excellent hedge to protect your investment portfolio against economic uncertainties and inflation. A diversification strategy that includes gold (or other precious metals) not only protects your portfolio against market turmoil, but gold also provides significant growth potential. A simple method for diversification is to open a self-directed IRA.