457 Retirement Plans

Section 457 Retirement Plans

Are you familiar with Section 457 retirement plans? Heard about the concept before? If yes, you've probably have encountered it the time you were planning which of the retirement plans available is best to consider. Well, just like the rest of the retirement plans, the Section 457 covers a lot of things that are worth knowing.

On the most basic, the Section 457 retirement plans are a type of non-qualified deferred compensation plan that only certain governmental and tax-exempt companies and organizations can offer for their employees. The purpose behind this plan is to allow employees to set aside funds for their retirement. And, it is interesting to know that although the 457 retirement plans are non-qualified plans, they somehow mimic a qualified plan for the reason that they offer a number of tax benefits for employees in the same way the qualified plan does.

What benefits are given? The Section 457 retirement plans basically provide the tax benefits that generally include pretax salary-reduction contributions, as well as tax-deferred growth of the investment earnings.

There are two forms of Section 457 retirement plans. The first is the so-called "eligible" Section 457 plans, and the second is the "ineligible" Section 457 plans. On one hand, the eligible plans cover certain restrictions on the amounts deferred. These plans are also subject to favorable tax treatment. On the other hand, the ineligible Section 457 retirement plans are those that provide or offer a greater degree of deferral and are specifically designed for executives.

Whatever form you may consider, it is important to note that both of those above mentioned forms have set certain limits on the amounts to be deferred. For instance, in the eligible Section 457 retirement plans, the amount deferred annually by an employee cannot exceed the littlest of 100% of his or her compensation. If we will put that into figures, here's what the deferrals will look like:

* $14,000 for tax year 2005
* $15,000 for tax year 2006

After 2006, it is expected that the applicable dollar amount will be adjusted for cost of living surges in increments of about $500.

So that's said. Now in terms of distribution, it has been maintained that in the Section 457 retirement plans, the distributions can only be made after the calendar year that the employee reaches age of 70 ½; after severance from employment; and after an unforeseen emergency. The distribution, however, can be rolled over into an IRA or other forms of eligible plans, but this time it must be under the same rules that apply generally to the rollover to the eligible plans. In addition, employees who consider Section 457 retirement plans can also rollover their plans into another Section 457 plan without even incurring the income tax placed on the amount rolled over.