At WiseGEEK, we're committed to delivering accurate, trustworthy information. Our expert-authored content is rigorously fact-checked and sourced from credible authorities. Discover how we uphold the highest standards in providing you with reliable knowledge.
A 457b plan in the United States is a retirement savings account available to state and local government employees and certain workers in tax-exempt organizations. This plan allows workers to deduct a certain amount of their yearly salary to place in an investment account. The capital in a 457b account grows tax-free until it may be withdrawn by an individual at the time of his or her retirement. Using this plan, employees can build up significant savings for the time when they can no longer work.
Retirement accounts are offered by most employers, but local and state governments and tax-exempt organizations like churches or hospitals have a specific account that they can offer. This plan is known as the 457b plan, so named because of the section of the Internal Revenue Service tax code than governs the plan. It works in a similar manner to traditional 401k plans, and in fact may be used in conjunction with those and other retirement plans.
There are many benefits to a 457b plan for those who are eligible to receive it. By deferring the salary received each year, a worker can reduce the amount of income that is taxable. By contrast, the money that goes into the retirement account is tax-free, as are any earnings that may be gained from the investment of that money. It must be noted that there is a limit to the amount that may be deferred each year by an employee, but it is a significant amount, which often changes with tax laws, that can add up over the span of a career.
In addition, another benefit of a 457b plan is a special provision that raises that deferral limit as an employee gets closer to the retirement age. This provision is known as the final three-year provision because it kicks in when the employee is three years from the retirement age. At that point, assuming that the employee hasn't previously contributed the maximum amount to the retirement account, the limit on the amount that can be deferred grows. Once again, this amount is subject to changing tax laws, but it is generally nearly double the normal limit for contributions.
The 457b plan is generally available to not only state and local government employees but also to specific employees of tax-exempt organizations. Such organizations may include churches, hospitals, and others that qualify for tax-exempt status. Tax laws in the U.S. generally limit the employees of such organizations eligible for this type of plan to certain management and supervisory personnel.