A 457 plan otherwise known as a compensation plan or a deferred compensation plan is an investment opportunity offered to individuals by a variety of entities including, but not limited to private organizations, tax exempt organizations, the state government or the local governments. The reason that a 457 plan is so called is because the IRS determines the rules, regulations and guidelines that such a plan must adhere to - the code 457 is attributed to the deferred compensation plan, hence the name 457 plan. A 457 plan differs somewhat to a 401k or a 403(b) plan, and the differences must be duly noted.
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So what exactly is a 457 plan? As mentioned previously, a 457 plan is a plan that is known as a deferred compensation plan and is offered to employees through an employer or agency. The 457 plan is a compensation plan that is established by contributions made by the employee via salary reductions. Any and all tax liabilities associated with a 457 plan and the contributions associated with it are deferred, hence the name "deferred" compensation plan. Provided by government agencies, a 457 plan is offered to various employees as a benefit of employment.
When an employee puts contributions into a 457 plan, the contributions are taken from the employee's pay before taxes have been deducted from the salary or compensation in question. The individual that makes contributions into a deferred compensation plan does not have to pay any taxes on the money placed into the plan until they decide to withdraw the money. There are some agencies that will add contributions for the employee, but many 457 plans are based on employee contributions only. The agency offering the 457 plan may also set specific limitations on who is eligible to participate in the plan as well. While some employers are willing to offer 457 plans to employees when their employment commences, others require a specific amount of time in title or vesting before the employee is eligible to participate in a 457 plan.
When it comes to 457 plans, the deferred compensation plans serve as a way for employees to ready themselves for the day they will retire from the job. One of the primary benefits derived from 457 plans is therefore found in the establishment of future financial stability. Another benefit found in having 457 plans is that the employee can minimize the amount of taxes they are paying to the IRS. As mentioned previously, the deferred compensation contributions are taken out as a payroll deduction and have a pre-tax status.
There are myriad benefits associated with deferred compensation plans for both the employer and the employee. First, employers that offer 457 plan contribution options have a way of providing their employees with a nice benefit; such a benefit is appealing and makes the employee more apt to remain with the company for the long term because of the retirement benefit offered. Second, since the 457 plan is a simple process, the employer has very few encumbrances in terms of managing a 457 plan.
Since a deferred compensation plan is an enticing and coveted benefit, many employers will find that by offering such a plan to employees they appeal to new applicant and maintain the number of current employees. Employees will deliver a level of quality and loyalty to the employer because they are rewarded with financial investment opportunities that may not be offered elsewhere. Thus, employee turnoff is subsequently reduced by employers that opt to offer a deferred compensation program to eligible employees.
Employees that are rewarded for their hard working efforts are far more productive than those who are not. A 457 plan can serve as a way to reward employees that remain dedicated to a specific job and position. Plus, deferred compensation plans are quite flexible in their structure and such plans are therefore often more desirable than other retirement plan options.
Employees also have advantages when enrolled in a 457 plan. Besides the reduced taxes, employees will find that they can actually make larger contributions into a 457 plan than they can in an Individual Retirement Account. Investing in a deferred compensation plan is totally convenient because the contributions are taken right out of the employee's check before taxes are taken out. In addition, if an employee desires to, they can move the 457 plan to another employer if they leave their current position and the next employer offers an opportunity to invest in a 457 plan.
There are limitations on what an employee can contribute to a deferred compensation plan each year; however the limitations are quite high. According to the Internal Revenue Service, the 457 code suggests that a 457 plan contribution limitation is, as of 2006, $15,000 a year for anyone under the age of 50. For those employees who are 50 years or older, the annual limit for a deferred compensation plan contribution actually increases to $20,000.00 a year. What's particularly nice about the deferred compensation plan is that when an individual reaches the point in his or her career when he or she is three years or less away from retiring, he or she can actually invest double the yearly limitations set on deferred compensation plans in some instances. From the latter data, it is easy to identify why deferred compensation plans are appealing; the 457 plan provides employees with a fast, tax deferred method of accumulating enough wealth to make retirement years considerably comfortable.
If an employee has not met the limit of eligible contributions in a single year, that remaining amount of the eligible contributions can be rolled over into the next year. For example, if an employee contributes 10,000 dollars into a deferred compensation plan in 2006 and the limit for that year is 14,000 dollars, the remaining 4,000 dollars can be added to the limits for the year 2007. Now, if the limits for contribution are 14,000.00 for 2007, the employee has a ceiling of contributions of 18,000 dollars for that year if they are less than 50 years of age.