Supplemental Retirement Plan to Save More

The 457 (b) deferred compensation plan is an employer-sponsored retirement plan that allows public employees to defer receiving a portion of their current compensation until retirement or separation from service.

The 457(b) plan is voluntary. You can choose to start, stop, increase or decrease contributions at any time. Since investing experts today recommend putting between 15% and 20% of current income toward retirement, the 457(b) plan enables employees to augment the savings they are putting toward retirement beyond their 401(a) plan.

Although some 457(b) plans offer an after-tax option, most are pre-tax. With a pre-tax 457(b) plan, by deferring payment of a portion of your current compensation, you’ll pay taxes on this income at a later date – presumably in retirement, when you may be in a lower tax bracket. Conversely, most people will be in the highest income tax bracket during their peak earning years.

Key Features of 457(b) Plans

The 457(b) plan is completely voluntary. You can choose to participate at any time, and you can decide when you want to increase or decrease your contributions.

Participants can contribute up to 100% of their salary, provided it doesn’t exceed the IRS stated dollar limit for the year. Read the section below for more details about IRS contribution limits.

Ability to reduce taxable income – You determine the amount you want to contribute. You can choose either a pre- or after-tax 457(b) plan, if your employer allows both options. If you choose the pre-tax plan, you will inherently reduce your current taxable compensation. In some cases, this might place your income in a lower tax bracket. You may want to consult with a tax advisor before making your decision.

Tax-deferred earnings – When you choose the pre-tax 457(b) plan, your earnings are reinvested and are not subject to taxes during this phase. You will be responsible for paying income taxes on your savings when you make a withdrawal.

Alternatively, if you choose the after-tax 457(b) plan, you will not pay tax penalties when you withdraw your earnings because you have chosen to contribute a portion of your current after-tax compensation toward your 457(b) plan.

Contribution credit – Eligible employee participants may be able to use the IRS Retirement Savings Contribution Credit, a tax credit based on retirement plan contributions designed to encourage low and middle-income taxpayers to save for retirement. The credit amount depends on your filing status and adjusted gross income and changes each year as set by the IRS.

You can move other retirement plan savings into your 457(b) plan in order to maximize potential compound earnings, simplify your plan management and get a more complete picture of your total retirement savings.

CRA has a multitude of investment strategies and fund options to choose from, including the CRA target date portfolios, book value fund and our trusted selection of institutional-class funds.

Special Benefits Unique to the 457(b) Plan

According to IRS requirements for 2022, "a 457(b) plan’s annual contributions and other additions (excluding earnings) to a participant’s account cannot exceed":

  • $20,500 for participants under 50
  • $27,000 for participants age 50 and older (special catch-up limit: $41,000)

These limits apply for both the pre-tax and the after-tax 457(b) plans. If you split your contributions between the pre- and after-tax options, the amounts will be combined and must stay within the applicable annual limit.

Unlike other retirement plans such as 403(b) and 401(a) accounts, participants can withdraw from 457(b) plans without penalty, regardless of your age, provided you meet distribution eligibility requirements. Remember though, a distribution from a deferred compensation plan may be subject to income tax assessments.

Just like other retirement plans, you need to start taking distributions, called required minimum distributions, or RMDs, from your 457(b) plan by the age of 70½ if you are not still working at that time, although you do not have to liquidate the account at that time.

Special Catch-Up Limits
For three years before the normal retirement age specified in your 457(b) plan, you may be eligible to contribute up to twice the annual limit. Or, you may be able to contribute the standard annual limit plus the amount of the standard limit not used in prior years (this is only allowed if you are not using age 50 or over catch-up contributions).

Retirement Savings Contributions Credit
The IRS Retirement Savings Contributions Credit provides a tax credit for voluntary contributions or elective deferrals to eligible retirement savings plans, such as the CRA 457(b) plan. The amount of the credit depends on your tax filing status and adjusted gross income. The amount of the tax credit can be determined by completing IRS Form 8880.

Consult your tax advisor for guidance on how these and other limits apply to your tax situation.