457 Plan FAQs
- What is a Governmental 457 Deferred Compensation Plan?
- A Governmental 457 Plan gives public employees save (Defer) part of their pay (Compensation) in an additional retirement savings plan with a variety of investment options, investment educational programs and related services to help State and local public employees achieve their retirement savings goals.
- How does a 457 Plan help me prepare for retirement if I already have a pension and Social Security?
- People are living longer, healthier lives and enjoying even more time in retirement. Being retired longer and considering how inflation causes things to cost more every year, a pension and Social Security may not be enough to last you and your spouse 20 years or more. A 457 Plan is a voluntary, additional way to save for retirement.
- What does tax deferred mean?
- The amount you contribute pre-tax into your account is not subject to current federal or New York State income taxes. Your contributions and any earnings grow tax deferred until you withdraw your money, generally in retirement. Your withdrawals will then be taxed as ordinary income, when you may even be in a lower tax bracket.
- If the Plan is tax deferred, do I ever pay taxes?
- Yes. When you are ready to take money from your pre-tax account, your withdrawal will be subject to federal income taxes. The payment of state income taxes will depend on your state of residence when you are receiving benefits from your Plan account.
- How does the amount I contribute affect my income tax?
- Your current federal and New York taxable income is reduced by the amount of money you defer. For example, if your salary is $50,000 and you defer $5,000 from your salary throughout the year ($192.31/ pay X 26 Paychecks), your income for federal and New York State income tax purposes will be $45,000.
- Are there other benefits besides income tax deferral?
- Potentially building additional retirement savings means you'll have greater financial independence and you won't have to rely solely on your pension and/or Social Security for retirement income. By participating in the Plan, you also have access to resources, education, and individual attention to help with your deferred compensation account as you plan for retirement, your life in retirement, and possibly a legacy for your loved ones.
- How are Roth contributions different?
- Roth contributions are made after-tax and do not reduce your taxable income when made. Roth contribution accounts grow tax deferred but with withdrawals, if qualified, are received tax free.
- How is The Plan different from an IRA?
- Offers the convenience of payroll deductions, which can keep you disciplined when it comes to saving for retirement.
- May allow you to defer larger amounts of money (up to $23,000 in 2024). Your right to use the Plan is not limited by any income level that may be imposed for IRAs.
- If separated from service, does not incur a 10% tax penalty for distributions taken before age 59½.
- How do I enroll in the plan?
- Call our office and we can walk you through the enrollment process, including choosing your investments & beneficiaries.
- Once I enroll, when do my payroll deductions start?
- Depending on when your account is active, payroll deductions typically start in 1-2 pay cycles.
- How do I keep track of my account?
- Once your account is active, you can log-in to the Empower website, www.EmpowerMyRetirement.com, to review your account and/or make any necessary changes you see fit.
- How much may I contribute from my paycheck?
- The minimum you can contribute per pay period is $10. You may contribute up to 100% of compensation after any required salary deductions (such as retirement system contributions, Social Security and Medicare taxes, health plan premiums, union dues, etc.) until you have reached the annual maximum contribution limit established by the IRS.
- What is the current contribution limit for calendar year 2024?
- As per IRS guidelines, the current maximum contribution limit is $23,000. If you are age 50 or over, you may contribute up to $30,500.
- May I change the amount I contribute to the Plan?
- Yes. You may increase, decrease, or suspend your contributions by calling our office and filling out a Contribution Change form. Some plans allow for contribution changes to be made by participants themselves by logging into your account on Empower. All changes will be implemented as quickly as possible. However, because of payroll timeframes, your deferral change may not occur for up to two payroll periods.
- What if I start contributing to the Plan in the middle of the year at a rate designed to produce the maximum contribution by year-end, but which if made for a full year would result in excess contributions?
- Your deferral rate will not be changed until you inform the Plan. If you want your deferrals taken more evenly throughout the year, you should adjust your deferral percentage. This can be done by calling our office or accessing your account online (for select plans only). Otherwise, your deferral rate will remain the same and payroll deductions will be automatically stopped when you reach your maximum contribution level. However, it is your responsibility to monitor the total contribution.
- May I divide my contribution among the different investment options?
- Yes. You may allocate your contributions in any whole percentage among the Plan investment options.
- What if I take a job with another employer?
- If you leave employment or your position with a participating employer, there are a number of options available to you. First, you can keep your retirement assets in your account which will allow you to continue all the benefits of Plan participation (numerous investment options, tax deferred growth of assets) while keeping fees competitive. Continuing your participation in the Plan provides you with access to your assets at any time you need additional funds. You are also eligible to receive payments from your Plan account through a payment option.
- If your new employer sponsors a Section 457(b) eligible deferred compensation plan, you may also transfer all or a portion of your Plan account balance directly to that employer's plan as long as the other plan will accept the transfer. In the case of a transfer, the amount transferred will not be treated as current taxable income.
- If your new employer sponsors a 401(k) or 403(b) plan, you may roll over all or a portion of your Plan account balance to the plan sponsored by your new employer as long as that plan will accept the transfer. Please note that the tax consequences, distribution options, investment options, and participation costs in a 403(b) or 401(k) plan may differ from the Plan. It's important to examine the requirements and limitations of any plan to which you consider rolling over your Plan account balance. You should also compare fees between the Plan and any other plan where you may be looking to roll over your assets. Qualified retirement plans, deferred compensation plans and individual retirement accounts are all different, including fees and when you can access funds. Assets rolled over from your account(s) may be subject to surrender charges, other fees and/or a 10% tax penalty if withdrawn before age 59½.
- Can I rollover my Plan account into an IRA?
- Yes. Participants who are eligible for a distribution may rollover all or a portion of those assets to an IRA.
- When can I make withdrawals from my Plan account?
- Each plan may have slight variants on withdrawal provisions, but most commonly they are:
- Separation from service, including regular retirement
- Unforeseeable Emergency Withdrawal (as defined by federal regulations)
- A Plan loan
- When you turn age 59½
- Required Minimum Distribution – when you turn age 73, the IRS requires you take a distribution, unless you are still employed by the same employer
- Death
- Birth or adoption of a child (up to $5,000)
- Purchase service credit in a qualifying pension plan
- Withdrawals from a rollover source
- Each plan may have slight variants on withdrawal provisions, but most commonly they are:
- What is separation from service?
- Separation from service occurs because of your voluntary or involuntary termination from employment, including when you retire. A leave of absence or suspension from employment is not a separation from service.
- How may I receive distributions?
- To initiate a payout, you can call our office. We can help you understand your options and what makes sense for your situation. You may also log into your account to request a distribution online.
- Is there a time when I must withdraw money from my Deferred Compensation Plan?
- If you have separated from service, you must begin receiving payments no later than April 1 following the close of the calendar year in which you turn age 73. It is called your Required Minimum Distribution (RMD).
- What happens if I am still employed at age 59½?
- If you remain employed with the municipality when you are 59½, you may receive your Plan distributions while you are employed or continue to defer distributions until you retire. If you decide to receive your Plan distributions, you may elect any of the distribution options previously discussed.
- If I am still employed at age 73 do I have to take a Required Minimum Distribution?
- If you remain employed with a participating employer, you are not required to receive a minimum distribution even when you reach 73 years of age. The RMD requirement does not take effect until you leave service with your participating employer.
- May I use my plan assets to purchase retirement service credit?
- You can use your Plan assets to purchase retirement service credit that is permitted by law in a New York State or New York City public retirement system.
- A participant must obtain documentation from his or her retirement system affirming his or her eligibility to purchase the service credit, such as prior service credit or veteran's credit, and the cost to purchase the service credit. A completed Retirement Service Credit Payment form and a copy of the response from the retirement system documenting eligibility to purchase service credit must be received by the Plan's Administrative Service Agency at least 15 days prior to the date that payment is due to provide sufficient processing time. The Plan will liquidate sufficient plan assets pro-rata to purchase the retirement service credit and send a check directly to the appropriate retirement system.
- A confirmation of the amount of assets liquidated from the participant's account and the payment date will be sent to the participant.
- How are distributions taxed by New York State?
- Distributions from the pre-tax portion of the Plan are eligible for the New York State income tax deduction applicable to private retirement plans, eligible retirement plans such as 401(k) and 403(b) plans, and Individual Retirement Accounts. To be eligible for this deduction, you must be at least age 59½ and the distributions must be in the form of periodic payments (non-lump sum payments). The deduction is limited to $20,000 each calendar year.
- Who is eligible for the income tax deduction?
- A taxpayer who is a New York State resident and at least age 59½ at the beginning of the calendar year is eligible to deduct up to $20,000 of distributions received during the entire year from the Deferred Compensation Plan, an eligible retirement plan or an IRA. A taxpayer who becomes 59½ during the calendar year may deduct those benefits received on and after the date he or she became age 59½, up to $20,000 each calendar year.
- If both my spouse and I are receiving distributions from the Plan and we file jointly, can we deduct up to $40,000?
- Each person may deduct up to $20,000 (each calendar year) of benefits received from the Plan. If each person is receiving benefits equal to or in excess of $20,000 and both meet the age criterion, then a $40,000 deduction can be claimed.
- If my distribution exceeds $20,000 but my spouse's distribution is less than $20,000, can we deduct up to $40,000 on our joint income tax return?
- No. The income tax deduction is limited to the benefit amount received by each person. For example, if you receive distributions of $25,000, you can deduct $20,000. If your spouse receives $15,000 in benefits payments, an additional $15,000 can be deducted, for a combined total deduction of $35,000. You cannot claim any unused portion of your spouse's deduction.
- What is an unforeseeable emergency withdrawal?
- Federal regulations define an unforeseeable emergency as a financial emergency resulting from illness, accident, or property loss to you or your dependents resulting from circumstances beyond your control. Payments can only be made to the extent that your qualifying expenses are not covered by insurance or money available from other sources.
- Can I take a loan against my Plan account balance?
- Certain plans allow for loans against your Plan account balance. You can call our office to determine if your plan allows for this.
Should you have any further questions, feel free to call our office at 585.385.0440 or you can send us a general email at info@457plangroup.com.