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.
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.
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.
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.
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 But money withdrawn at retirement, after age 59 1/2, will be tax-exempt.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.
Bob Haring has been a news writer and editor for more than 50 years, mostly with the Associated Press and then as executive editor of the Tulsa, Okla. "World." Since retiring he has written freelance stories and a weekly computer security column. Haring holds a Bachelor of Journalism from the University of Missouri.