top of page
Search

There for You: Benefits of a 457(b) Deferred Compensation Account

"Why Should I Care?" and More Answers To Your Most Important Questions


I work closely with many firefighters and have the privilege of visiting fire stations to talk with them about their retirement planning. This includes topics like saving for the future, understanding their pension, using their DROP money (if they choose that option), and exploring their Deferred Compensation. During these visits, I share a lot of information, and if you have a 457(b) Deferred Compensation account, you’re in luck! This could be a great way to save for retirement while also reducing your current tax bill.


But what exactly is a 457(b), and why should it matter to you? There’s often some confusion between Deferred Compensation and the 457(b) plan. For most of the firefighters I work with in Ohio, these terms are used interchangeably, even though different cities or townships may offer different plans.


Let’s break it down!


Big Contribution Limits: Save More, Tax-Deferred

In 2025, you can contribute up to $23,500 to your 457(b) account each year, either as a pre-tax contribution or as Roth (if your plan offers it). Pre-tax contributions lower your taxable income right now, while Roth contributions mean you pay taxes upfront, but your withdrawals in retirement are tax-free. Pretty cool, right? The benefit of pre-tax contributions is that you get the immediate advantage of reducing your tax bill today, essentially pushing your taxes down the road to when you retire.


On the other hand, with Roth contributions, you pay taxes now, but if your account has been open for at least 5 years and you're 59½ or older, any growth in your account is completely tax-free. That’s a huge win! Both options have their perks, and it’s worth thinking about how each could work for you.


Sometimes, I bring "Now and Later" candy to the fire stations because, not only do firefighters love sweets, the candy is a fun way to illustrate these options: spend some money now and save some for later, or pay your taxes now so you don’t have to later. The comparisons can go on, but I’ll save more for LATER 😉.


Catch-Up Contributions

If you're 50 or older, there's even more good news: in 2025, you can contribute an extra $7,500 to your 457(b)! This "catch-up" provision is a great way to boost your retirement savings as you get closer to retirement. Even better, if you're between the ages of 60 and 63, you can take advantage of a "super catch-up" contribution, which lets you contribute up to the greater of $10,000 or 150% of the regular catch-up limit. In 2025, that means you could contribute up to $11,250! For more details on this special provision, check out IRS Publication 571.


But wait… there’s more! If you haven’t contributed the maximum allowed and you're in a position to catch up on savings before retirement, you can make up for lost time by contributing up to double the regular amount, which in 2025 means you could save up to $47,000! Just keep in mind that you can’t combine all these options to save even more at once.


Health Insurance Premiums in Retirement

When you retire, one major expense you'll face is health insurance. Fortunately, with your 457(b) plan, you can use up to $3,000 per year to cover health insurance premiums after you retire. This can help reduce your tax bill while ensuring you're still covered—a benefit that’s especially available to public sector employees (thanks to the IRS Public Sector Provision). Just remember, there’s some paperwork involved, and you’ll need to keep good records. Feel free to reach out to me, and I can help guide you through the process!


Loan Option: Borrow From Yourself

One of the great things about a 457(b) plan is that you can borrow from your balance if you need cash. And the cherry on top? You’re paying yourself back with interest—so it’s like giving yourself a loan! Pretty cool, right? But, just between us, I might try to talk you out of it if you ask for my advice.


Here are the rules for borrowing from your 457(b):

  • You can borrow up to 50% of your account balance, with a maximum of $50,000.

  • You'll need to repay the loan based on your plan's terms, which may include interest.


While borrowing from your retirement account might seem like a quick fix, I recommend considering it carefully. When you take a loan, the amount you borrow is no longer invested in the market, meaning it’s not growing (or shrinking) with market fluctuations. Essentially, your balance decreases by the amount you borrowed, which could impact your long-term savings. So, while it’s a useful option in an emergency or for an important investment in your future, I’d suggest using it only as a last resort.


Moving Money Between Plans

If you decide to roll your 457(b) account into an IRA or another retirement plan, keep in mind that the rules of the new plan will apply to your money. So, if you transfer your 457(b) funds to an IRA or a new employer’s plan, you’ll have to follow those plan’s rules for withdrawals and distributions.


 Here's the catch: If you roll over funds from another retirement account (like an old 401(k)) into your 457(b), the withdrawal rules from the original plan still apply. This means that if you took money out early from the old plan without a penalty, you could end up facing that penalty when you withdraw from your 457(b) before age 59.5.


Self-Directed Brokerage Option

Some 457(b) plans also come with a self-directed brokerage account option, meaning you get to choose your investments rather than just relying on the plan’s set options. If you’re someone who likes to manage your own investments and have more control over your retirement funds, this could be a game-changer! But always make sure you understand the risks involved before diving in.


Access to Your Money Before 59.5

Unlike many other retirement plans, 457(b) plans are unique because you don’t face the typical 10% early withdrawal penalty if you need to take money out before age 59.5. This means that if you retire early or leave your employer, you can access your funds without worrying about that extra penalty (though you'll still pay regular taxes on the withdrawal if you saved with pre-tax money).


This is a huge benefit for those who want more flexibility in retirement planning.

While a 457(b) plan has some excellent benefits, there are also a few things you need to keep in mind.

·       Contribution Limits

·       Rollovers and Early Withdrawals

·       Employer Participation


A 457(b) Deferred Compensation plan can be an awesome tool to save for retirement, especially if you're in a public sector job. With the ability to contribute up to $23,500 (and more with catch-up contributions), a loan option, and some tax-saving perks, it’s definitely worth considering as part of your financial strategy. Just be sure to understand the rules, especially when it comes to early withdrawals or rollovers, to make the most of your 457(b) plan. If you have questions, call me, I’d love to work with you.


For more details on IRS rules and how your 457(b) works, check out resources from Fidelity and Schwab.

Sources:

 
 
 

Kommentare

bottom of page