A 457(b) salary reduction agreement is a type of plan that allows employees of certain types of organizations, such as state and local governments, to save for retirement on a tax-deferred basis. This type of plan is similar to a 401(k) plan, but with a few key differences.
One of the most important differences between a 457(b) plan and a 401(k) plan is that 457(b) plans are not subject to the same contribution limits as 401(k) plans. While 401(k) plans have a maximum contribution limit of $19,500 per year (as of 2021), 457(b) plans allow employees to contribute up to $19,500 in addition to any contributions they may make to a 401(k) plan or other retirement savings plan.
Another key difference between 457(b) plans and other retirement savings plans is that 457(b) plans are not subject to the same early withdrawal penalties as other plans. If an employee leaves their employer before they reach retirement age, they can withdraw their funds from a 457(b) plan without incurring the 10% early withdrawal penalty that applies to other plans.
The key to maximizing the benefits of a 457(b) plan is to take advantage of the salary reduction agreement that allows employees to contribute a portion of their salary to the plan on a pre-tax basis. By doing so, employees can reduce their taxable income and save for retirement at the same time.
To participate in a 457(b) plan, employees must first complete a salary reduction agreement, which specifies the percentage of their salary they wish to contribute to the plan. This percentage can be changed at any time during the year, subject to any restrictions imposed by the plan.
In some cases, employers may also offer matching contributions to 457(b) plans, similar to the matching contributions that are common in 401(k) plans. These matching contributions can help employees maximize their retirement savings and provide an additional incentive to participate in the plan.
Overall, a 457(b) salary reduction agreement can be a valuable tool for employees of state and local governments and certain non-profit organizations to save for retirement on a tax-deferred basis. By taking advantage of this type of plan, employees can reduce their taxable income, maximize their retirement savings, and take advantage of the unique features and benefits that 457(b) plans offer.