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What is a 457 Plan?
As a public sector employee, you have a unique opportunity to build
retirement savings and reduce today’s taxes with a Section 457
deferred compensation plan.
A 457 plan is a program that allows you to defer compensation on a
pre-tax basis through payroll deduction. This pre-tax advantage allows you
to defer federal and (in most cases) state income taxes until your assets
are withdrawn.
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| What are the advantages? Reduces your current income taxes while boosting your retirement
savings.
Allows earnings to accumulate tax-deferred.
Offers portability - You can move your savings to another public sector
employer's 457 plan.
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How much can I contribute?
Under Section 457 of the Internal Revenue Code, you may generally defer
a maximum of 100 percent of your taxable income after subtracting 457
deferrals, or $11,000 per year (as of 1/1/2002), indexed, whichever is
less.
The Small Business Job Protection Act of 1996 provides that the 457
contribution dollar maximum will be increased in $500 increments based on
changes in the Consumer Price Index (CPI). The limit will be rounded to
the lowest multiple of $500.
457 contribution limits will be reported by the Internal Revenue
Service in October or November of each year. RC will notify employers and
participants of any change to the 457 contribution limit following the IRS
announcement.
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The 457 Catch-up Provision
The IRS catch-up provision enables you to make up for contributions not
deferred in previous years. You may catch-up for any year(s) since January
1, 1979, if you were eligible to contribute to a deferred compensation
plan but did not contribute the maximum amount allowed under the Internal
Revenue Code. The maximum amount is 25 percent of your post-deferral
taxable compensation or $11,000 (as of 1/1/2002) indexed, annually,
whichever is less.
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| How does the catch-up provision work? To catch-up, you must use the
three-year catch-up period immediately preceding the year of your declared
normal retirement age to defer additional income through your employer.
The age you declare for your normal retirement age must be one in which
you are eligible to receive unreduced benefits from your employer's
regular pension plan. The amount you are permitted to contribute during
this three-year period is determined by subtracting the actual amount you
contributed each year from the maximum amount allowed by law each year.
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| Who is eligible to use this provision? You are eligible to use the
catch-up provision prior to retirement if both of these points apply to
you:
You were eligible to participate in a Section 457 deferred compensation
plan under any employer, any time from January 1, 1979, to the present,
and you are currently participating in the ICMA Retirement Corporation
deferred compensation plan. (A Section 457 plan is one regulated by
Internal Revenue Code Section 457, concerning deferred compensation for
state and local government employees.)
You did not defer the maximum amount allowed by law in one or more of
the years you were eligible to participate since 1979.
This includes years when you did not choose to join the plan, although
you were eligible.
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| How much may I defer? The maximum amount that may be deferred during
any year of the three-year catch-up period is a combination of the regular
deferral for that year plus any amount not contributed in earlier years
since 1979 when you were eligible to participate in a Section 457 deferred
compensation plan. The total amount deferred in any one catch-up year
cannot exceed $15,000. Depending on your account history, you may or may
not be eligible to contribute the full $15,000 in each of the three
catch-up years.
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| Always consult with a professional tax advisor to determine your
potential tax consequences. |
