457 Deferred Compensation

Saving and investing money for the future is a concern that countless individuals address on a daily basis. Thankfully, there are a number of options to choose from and some of these are more familiar to the general public. A handful of examples here can include a 401k plan, annuities or a standard retirement package. Still, any of these methods in and of itself may not be able to provide an adequate level of liquidity for the future. One interesting alternative that can be used in combination with other options is known as a 457 deferred compensation plan. What is this plan, what are its advantages and why should it be considered as an addendum to one's existing monetary strategy?

A Look at 457 Deferred Compensation Plans

First, we should note that these are plans which are offered by an employer or a third-party firm. They will mainly apply to those who work in the public sector (such as fire fighters, police officers and civil servants). Much like other packages, a portion of one's money will be set aside after each pay cycle. These funds are then invested in a number of different areas (there will be more on this later). Thus, the employee is able to accrue additional wealth while simultaneously enjoying the benefits of other standard compensation packages.

The Yearly Contribution Limits

A 457 compensation plan is naturally associated with yearly contribution limits. Those who are under the age of 50 can put aside up to $18,000 dollars during the standard tax year. This value increases to $24,000 dollars for those over the age of 50. There are even times when $36,000 dollars can be placed into this plan. This instance is only available for those who are approved for "catch-up" pre-retirement contributions. It is always wise to speak with an employer or a financial professional to appreciate which category is the most relevant.

A Roth 457 Deferred Compensation Plan

It is worth noting that there is a slight alternative to the standard 457 deferred compensation scheme. A Roth account is another option to consider. Much like a standard Roth packages, taxes on any contributions are paid BEFORE the money is placed within the account. This enables the policyholder to enjoy tax-free withdrawals in the future. There are two stipulations to this alternative. First, the individual must be at least 59 1/2 years old. Secondly, he or she is required to wait for a minimum of five years after the account is opened to make the first withdrawal. This variant of the standard 457 deferred compensation plan can be an ideal choice if:

This plan is rather new, so it is wise to determine whether or not it is offered by one's current employer.

457 Deferred Compensation Investment Options

One of the major advantages of a 457 deferred compensation plan is that its investment vehicles are quite flexible. Note that this is not always the case with some other retirement packages. This is an ideal scenario for those who have been hoping to take control of their supplemental income stream. Some of the options that are normally offered include:

There is also an opportunity to invest in what are known as target-risk funds. As the name may hint, these instruments are intended to match the level of risk desired by the policyholder. They can be conservative or aggressive in their nature. Stocks, bonds and commodities are some examples of the underlying assets present.

457 Deferred Compensation Withdrawals

Once one retires, he or she can begin to make withdrawals from this fund. However, recall that five years must be allowed to elapse for those who chose to become involved with the Roth 457 compensation package. As always, taxes will need to be paid on a standard 457 deferred compensation withdrawal. There could still be possibilities when one will work past the normal retirement age. In such an event, withdrawals may be allowed for anyone who is 70 1/2 years or older. Many plans contain the stipulation that funds can be accessed by those who have suffered an unforeseen emergency (such as a financial crisis or a medical issue). It is prudent to consult a professional to learn more about these instances.

Beneficiaries Within 457 Deferred Compensation Plans

The policyholder always has the opportunity to name their beneficiaries. This can provide a sustainable level of income to any loved ones upon one's death. This is also an effective way to mitigate the delays normally associated with probate and the recipients will enjoy substantial tax benefits.

Combining Accounts

There are often times when an individual wishes to combine his or her existing accounts into this 457 deferred compensation plan. This is a wise idea for those who have been searching for an easier way to manage their retirement portfolio. Individual retirement accounts and similarly qualified plans are normally included here. We should highlight that surrender charges may apply and the funds could be subject to a penalty of ten per cent if they are withdrawn before the age limit of 59 1/2 years.

Applying for a Deferred Compensation Plan

There are several online sources which provide the means to register for this form of compensation. While it is still wise to speak with an employer, it is just as prudent to appreciate some of the basic information that will be required. These metrics include:

There are also numerous third-party providers which can offer this compensation package and as with any investment, it is wise to compare and contrast at least three firms to appreciate which ones offer the most comprehensive services and customer support.

So, we have seen some of the main advantages associated with this compensation package. These can be valuable options for anyone who is looking to maximise future returns and to enjoy a stable source of income once they reach the age of retirement. To fully appreciate these and other benefits, it is prudent to speak with a qualified retirement professional.