Rules for 457(b) Retirement Plans
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Retirement Perspectives

Employees of government and nonprofit organizations can use 457(b) plans to save for retirement, but the rules are different for the entities.

If you or your clients work at a governmental or nonprofit organization, participants enrolled in the organization’s 457(b) deferred-compensation savings plans can build assets on a tax-free basis. But the rules differ depending on the entity sponsoring the plan.

Tax-Exempt Organizations
457(b) plans for nongovernmental, tax-exempt entities are much more restrictive than for governmental plans. The primary difference is that only “highly compensated” employees or “groups of executives, managers, directors or officers” of a nonprofit are eligible to participate in the organization’s 457(b) plan. So many employees at nonprofits are ineligible, which is why the savings plans are sometimes referred to as “top hat” plans.

Another important characteristic of nonprofit organization 457(b) plans is that the deferred compensation accounts are not held in a trust for the highly compensated employees. Instead, the assets remain the property of the employer until they are paid out to the participant, which makes them vulnerable to creditors.

With regard to distributions from the funds, be cautious: 457(b) plans sponsored by tax-exempt entities do not have the same distribution rules that generally apply to qualified plans, such as 401(k) and 403(b) plans. Assets may be distributed only after specifically stipulated events, such as when the participant turns 70½ years old, dies, separates from service (through retirement, resignation, or dismissal), or for an “unforeseeable emergency” (457 version of a “hardship” in qualified plans).

Governmental Organizations
Government 457(b) plan distribution rules allow for a one-time cash-out of de minimis accounts valued at less than $5,000. Rollovers of eligible distributions are permitted between employer sponsored qualified retirement plans, Section 403(b), governmental Section 457(b) plans, and IRAs. However, this rollover rule does not apply to Section 457(b) plans maintained by nongovernmental tax-exempt organizations.

Upon separation from service, participants in governmental 457(b) plans can transfer their accounts to a new employer's governmental 457(b) plan. Likewise, a participant in a tax-exempt employer's 457(b) plan can transfer his or her account to a new employer's tax-exempt 457(b) plan. The rules do not allow a participant to transfer funds from a tax-exempt 457(b) plan to a governmental 457(b) plan, and vice versa.

Assets held in a tax-exempt 457(b) plan cannot be rolled over into an IRA. Only governmental 457(b) assets can be rolled over into an IRA upon certain distributable events.

Distributions from all 457(b) plans to a participant before age 59½ are not subject to the 10% early-distribution penalty that typically applies to employer-sponsored qualified retirement plans and IRAs. But employees who roll over their governmental 457(b) deferrals into one of those other plans will be subject to the 10% penalty if they take withdrawals from the now-combined plan before turning 59½, unless an exception applies.

If you are an employee of a government agency or nonprofit organization, please seek the advice of a certified financial advisor or tax professional before you make any investment decisions in your 457(b) account.



457(b) is a nonqualified, deferred-compensation plan established by state and local governments, tax-exempt governments, and tax-exempt employers. Eligible employees are allowed to make salary deferral contributions to the 457 plan. Earnings grow on a tax-deferred basis and contributions are not taxed until the assets are distributed from the plan.

Traditional IRA contributions plus earnings, interest, dividends, and capital gains may compound tax-deferred until you withdraw them as retirement income. Amounts withdrawn from traditional IRA plans are generally included as taxable income in the year received and may be subject to 10% federal tax penalties if withdrawn prior to age 59½, unless an exception applies.

401(k) is a qualified plan established by employers to which eligible employees may make salary deferral (salary reduction) contributions on an aftertax and/or pretax basis. Employers offering a 401(k) plan may make matching or nonelective contributions to the plan on behalf of eligible employees and may also add a profit-sharing feature to the plan. Earnings accrue on a tax-deferred basis.

A 403(b) is a retirement savings plan that offers employees of public schools and non-profit 501(c)(3) tax-exempt organizations to invest on a pretax and or Roth aftertax basis. Contributions to a 403(b) plan are conveniently deducted directly from an employee’s paycheck. In addition, the employer may elect to make a contribution on the employee’s behalf.

A required minimum distribution (RMD) is the minimum amount an account owner must withdraw from a retirement account each year. An owner generally has to start taking withdrawals from a retirement plan account at age 70½. Roth IRAs do not require withdrawals until after the death of the owner.

To comply with Treasury Department regulations, we inform you that, unless otherwise expressly indicated, any tax information contained herein is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or any other applicable tax law, or (ii) promoting, marketing, or recommending to another party any transaction, arrangement, or other matter.

The information is being provided for general educational purposes only and is not intended to provide legal or tax advice. You should consult your own legal or tax advisor for guidance on regulatory compliance matters. Any examples provided are for informational purposes only and are not intended to be reflective of actual results and are not indicative of any particular client situation.

The information provided is not directed at any investor or category of investors and is provided solely as general information about Lord Abbett's products and services and to otherwise provide general investment education. None of the information provided should be regarded as a suggestion to engage in or refrain from any investment-related course of action as neither Lord Abbett nor its affiliates are undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity. If you are an individual retirement investor, contact your financial advisor or other fiduciary about whether any given investment idea, strategy, product or service may be appropriate for your circumstances.

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