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Money Cents

Understanding Your 457 Retirement Plan
By Shelley Phillips-Mills
May 30, 2005 - 11:26:00 AM

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As you know, there are many retirement plan options available in the marketplace. But 457(b) plans may not be one of the most common or well known type of plan. If you are eligible to participate in a section 457(b) retirement plan, you may have several questions about how to best use the plan to save for your future. While each plan may include slightly different variations that you may want to discuss with your employer’s benefits department, some basic features are important to understand. Here are some answers to some common questions you may have about your plan:

What is a 457(b) plan?

Code Section 457 applies to an employer sponsored retirement plan maintained by a state, local government or tax-exempt organization (other than a governmental unit) so anyone working for an organization of this type is eligible to participate in this type of retirement plan. These plans are commonly referred to as nonqualified deferred compensation plans.

What are the 457(b) plan deferral limits?

Annually, plan participants can contribute up to 100 percent of their compensation, as long as it does not exceed $13,000 for 2004. In addition, the annual deferrals under a 457(b) plan will no longer have to be coordinated with deferrals made to a 401(k), 403(b), SEP or SIMPLE IRA during a single plan year - as was previously the case - allowing you to make the most out of the plan’s contribution limits.

Are catch up provisions allowed within 457(b) plans?

There are a couple of options for catch up contributions in this plan. One option allows plan participants who are 50 and older to make additional annual "catch up" contributions of up to $3,000 for 2004 and $4,000 in 2005. The catch up contribution limit will increase each year by $1,000 until it reaches $5,000 in 2006. The catch up contributions will then be indexed in $500 increments beginning in 2007.

Are 457(b) plans subject to vesting requirements?

Employers have full discretion to specify conditions required to become fully or partially vested in the employer matching and/or nonelective contributions. Employee contributions are always fully vested.

What are the distribution alternatives available under 457(b) plans?

Distributions from a 457(b) plan must be specified within the plan as a fixed or determinable time of payment. This is indicated by an event that triggers the participant’s right to receive, or begin receiving, the amount deferred under the plan. Qualifying events include an unforeseeable emergency, separation from service due to termination or retirement, reaching the age of 70 ½ or death (payments go to the beneficiary). Distribution alternatives include lump sum payment, installments and annuity payments. Government 457(b) lump sum distributions are eligible for rollover into IRAs and other qualified plans, such as a 401(k). In addition, 457 plans assets may be transferred to other 457 plans.

Are mandatory distributions required for 457(b) plans?

The rules vary by the type of employer organization sponsoring the 457(b) plan. If the employer is a tax-exempt organization, distributions must begin by April 1 of the calendar year after the participant reaches the age of 70 ½. If the employer is a government or governmental agency, distributions may be deferred until the either April 1 of the calendar year after the participant reaches the age of 70 ½ , retirement or separation of service, whichever comes later.

Will participation in a 457(b) plan prohibit contributions to an IRA?

No. Because 457(b) plans are considered nonqualified retirement plans, participants may contribute to their IRAs. If the participant is not covered by any qualified retirement plan, the contribution may be deducted from your current income.

For more information on this and other types of retirement plans, discuss with your financial consultant. If you would like to receive the A.G. Edwards’ publication, "What You Should Understand About Your Section 457 Plan," please contact financial Consultant, Shelley Phillips-Mills in Bangor at 1-800-047-5456.

This article was provided by A.G. Edwards & Sons, Inc., Member SIPC.

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