Is an IRA Better Than a 457?

A 457(b) plan and an individual retirement account both provide savings for retirement, but they are allowed under different sections of the Internal Revenue Code. A 457 is restricted to employees of state and local governments and agencies and of tax-exempt organizations under the 501(c)3 provision. A traditional IRA is available to almost any taxpayer, although there can be income limits for those covered by other retirement plans.

Contribution Limits

A 457(b) program has to be set up by an employer, but as of 2013 any eligible employee can defer up to $17,500 a year in pay into the account. The equivalent tax-deductible contribution limit for an IRA is $5,500. Both systems allow "catch-up" contributions for those older than 50, but the 457(b) limit is $5,500, against $1,000 for an IRA.

Two Accounts

A person covered under a 457(b) program can also have an IRA. However, IRA contribution rules limit tax deductions for contributions by income. A taxpayer filing a joint return who is covered by a 457 can't make a deductible IRA contribution if the combined income is more than $115,000. And the deduction is reduced for income between $95,000 and $115,000.

Rollovers

A 457(b) account in a governmental plan can be rolled over, or transferred, into a traditional IRA. It also can be rolled over into another type of retirement plan, such as a 401(k) for private employers or a 403(b) for schools and educational institutions. It could be rolled into a Roth IRA, but those distributions would be subject to income taxes because Roth plans are funded with after-tax money.

Private 457 Plans

There also are non-governmental 457 plans. These are limited to management or highly compensated employees, such as people who own more than 5 percent of a business. They are subject to the same contribution limits as government 457s. These people also can have IRAs, so long as they fall under the income limitations.

Maximizing Contributions

A person nearing retirement may opt to make the maximum pay deferral into a 457(b) plan and also put the maximum into a traditional IRA. If a Roth option is available in the 457 plan and a taxpayer opens a Roth IRA, he will lose immediate tax deduction benefits. But money withdrawn at retirement, after age 59 1/2, will be tax-exempt. That can be a benefit when a retiree is on limited income.

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