401k Distributions And 401k Vs 457
401k vs 457: One Essential Definition
Retirement savings accounts get their designations from the sections of the Internal Revenue Code, which govern them. Provisions for state and local government workers are covered in section 457.
Nearly identical to the 401k, the 457 plan allows employees of tax-exempt agencies to establish retirement accounts which shelter earnings from taxes at the time they are paid. In the simplest available definition, MySavingsAtWork. Com explains, a 457 is either "a plan established by any of the fifty states and the District of Columbia, or any of their political subdivisions," or a 457 is "a plan established by a tax-exempt organization other than a state or a church-for example, hospitals, charities, and social welfare agencies."
401k vs 457: The Match-ups
In most states, government employees may choose either a 401k or a 457; and in some cases, they may choose both, effectively doubling their contribution limits. Most states typically do not offer Roth investments to their employees.
Therefore, the 401k vs 457 comparison makes a significant difference to state employees as they become eligible for participation in the plans; and it's extremely difficult to find resources that simply hold them next to one another for the sake of efficient comparison and contrast. Tennessee has a simple, easy to read 401k vs 457 spreadsheet which shows state-specific info; careful research did not reveal a comparable document for any other state.
Acknowledging that specifics vary from state to state, we nevertheless can compare and contrast 401k vs 457 in general terms.
Maximum annual deferral: identical
Employer matching contributions:
None for 457. For 401k, state contributions are subject to legislatures' appropriations. In 2008, the average was $50 per month. Analysts expect that, given the recession and huge state deficits, most states will forego employer matches until their budgets balance.
Catch-Up Deferrals for workers over Fifty Years of Age: For 457 participants, they may use the Catch-Up provisions which normally apply to 401k's; and, in the last three years before age 65, they may accelerate their Catch-Ups to the Federally prescribed limit. Ironically, for 401k participants, most states allow no Catch-Ups. But we find sharp variations from state to state and among other tax-exempt organizations.
Withdrawals Permitted: For 457 participants, retirement and termination naturally trigger authorized withdrawals, typically in one lump sum. And the usually emergency and hardship provisions apply; some states include first-home purchase, and some do not. For 401k participants, the usual terms and conditions apply, and attainment of age 59 allows for withdrawal at the employee's discretion. Some states prohibit withdrawals of employer contributions, and some restrict withdrawals of contributions made after specific dates, implying that withdrawal numbers among the privileges of long-time tenure.
Tax Advantages on Lump-sum Distributions: For 457 participants, all the tax advantages accrue at the time of deferral, and lump sums are taxable in the year they are distributed. In many states, workers who postpone retirement past age 70 become eligible for income-averaging to reduce their tax liabilities on lump-sum distributions.
Benefits must begin no later than... In most states, the rules comply with the Federal standards, and therefore are identical: Both 457 participants and 401k subscribers must begin distribution by April first of the year following attainment of age 70 or the year of retirement-whichever is later.
Tax Penalties: 457 recipients pay no penalty on distributions before 59 1/2; but they pay 50% excise tax if they do not comply with required minimum distributions. The standard rules apply to 401k's-10% penalty and full taxation on most distributions taken before age 59 and 50% excise tax if recipients fail to take mandatory minimum distributions.
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