In today's financial landscape, building a secure and tax-advantaged retirement nest egg is paramount. One such powerful tool at your disposal is the 457 retirement-savings plan, which offers unique benefits that can significantly impact your financial future. Let's delve into four key aspects of 457 plans that you may not be fully aware of.
1. Tax-Efficient Contributions
Reduce Take-Home Pay with Minimal Impact: Contrary to common belief, contributing to a 457 plan has a smaller impact on your take-home pay than you might expect. For instance, if you find yourself in the 22% federal income-tax bracket, contributing $500 per month reduces your take-home pay by only $390. This happens because your contributions are made pre-tax, meaning they are deducted from your paycheck before federal income taxes are applied.
2. Increased Contribution Limits
2020 Brings Higher Savings Potential: 457 plans became even more attractive in 2020 as the contribution limits were raised. The annual limit for contributions increased from $19,000 in 2019 to $19,500. What's more, individuals aged 50 and above can take advantage of catch-up contributions, which also received a boost, raising the limit by an additional $500 to $6,500. This elevates their total contribution limit to $26,000 in 2020.
3. Special Catch-Up Contributions
Unlock Extra Savings: A lesser-known feature of 457 plans is the opportunity for a special kind of catch-up contribution. If you're within three years of your plan's "normal retirement age," and you haven't maximized your contributions over the years, you may be eligible to contribute up to double the usual limit. In 2020, this amounts to a total of $39,000. Keep in mind that you cannot take both the "pre-retirement catch-up" and the age 50 catch-up in the same year. For detailed information on eligibility, consult your plan's guidelines.
4. Flexible Withdrawal Rules
Enjoy Penalty-Free Access: Unlike many other retirement-savings accounts, 457 plans offer greater flexibility in terms of withdrawal rules. You can take penalty-free withdrawals from your 457 account at any age once you've left your job. This stands in contrast to other retirement plans, which often impose a 10% penalty for early withdrawals before age 55 or 59½, depending on your employment status.
In conclusion, 457 retirement-savings plans are a powerful financial tool that can significantly bolster your retirement savings. With the potential to lower your take-home pay by less than you might think, increased contribution limits, the option for special catch-up contributions, and flexible withdrawal rules, they offer a myriad of advantages that can shape a financially secure retirement. Explore the possibilities of your 457 plan and seize the opportunity to secure your financial future.
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Take control of your financial destiny with a 457 retirement-savings plan, and enjoy the peace of mind that comes with a well-planned retirement strategy.
