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While most Americans have heard of 401(k) and even 403(b) plans, 457 plans might not be as well-known despite being an important type of retirement savings plan for a specific set of employees. They can be a great way to start saving for retirement, although many people will later opt to reallocate their retirement savings to diversify their holdings and seek out more security for their future.
In this article we’ll start out by reviewing the basics of a 457 plan, then talk about how you can roll over your 457 funds to buy precious metals like gold and silver through a rollover into a self-directed IRA (SDIRA).
(To jump straight into how to roll over your 457 plan into a SDIRA, click here.)
Similar to the 403(b) plan, 457 plans are available to only state and local government employees, as well as to a select group of non-government employees working at 501(c) tax-exempt non-profits. But how a 457 plan works is quite a bit different from other retirement plans.
The main purpose of a 457 plan is for employers—including state or local governments and non-profits—to contribute to an employee’s retirement on a pretax basis. Since 2010, Roth accounts—and therefore after-tax contributions—have been allowed as well.
These plans sprung up out of the Revenue Act of 1978, specifically for use by municipal employers. Eight years later, the Tax Reform Act of 1986 ended new 401(k) plans for government employees. That made 457s the primary deferred compensation option for municipalities.
There are two types of 457 plans: 457(b)s, which are the most common, and 457(f)s. Each plan comes with certain advantages and disadvantages compared to other defined contribution savings plans.
The most common type of 457 plan is the 457(b), used mainly by government employers such as the police, firefighters, and schools. Since these organizations are prohibited from offering 401(k)s, 457 plans were created instead although they don’t offer exactly the same benefits for employees.
To answer why someone would want to contribute to a 457, here are the main advantages:
As you can see, 457 plans do operate much like 401(k)s do in the private market. However, there are some additional advantages. Likewise, they do have some slightly different rules that don’t always make them a top choice if other options are available.
457 plans have evolved significantly from their 1978 beginnings. As noted above, in 1986 these retirement plans became the primary retirement savings tool for state and local government employees. Since then, two major pieces of legislation have altered these plans.
In the Economic Growth and Tax Relief Reconciliation Act of 2001, contribution limits evolved. In the “work well with other plans” point above, employees with both a 401(k)/403(b) and a 457 plan can contribute the annual limit to both plans, rather than coordinating the total between the two.
An additional change came from the Small Business Jobs Act of 2010. It opened up Roth accounts for 457(b) plans. Meaning, employees with a 457 can choose to contribute after-tax income to their plans that include a Roth account. A Roth 457 allows you to withdraw your money tax-free in retirement since you pay taxes as the money goes into your account.
These aren’t the only rules and changes these defined contribution savings plans have endured. And there are a few that greatly differentiate 457s with their counterparts. Let’s look at a few.
The IRS has more details about the specific rules and technicalities of 457 plan taxation, contribution limits, and other similar guidelines.
As noted, investment options are limited inside of 457 plans, with most offering only a handful of annuities and mutual funds. If your employer participates in them, 457 plans can be a starting point for retirement savings.
However, even the SEC speaks of asset allocation and diversification as being critical principles of sound investing. Many people find themselves reallocating their retirement savings and diversifying their holdings.
One way to diversify your retirement savings—and potentially hedge your savings against inflation—is by buying precious metals in an IRA. Precious metals can offer several benefits, including:
With the limited options available in 457 plans, reallocating all or some of your 457 plan into other retirement vehicles—such as a Precious Metals IRA—could help protect your future.
If you currently have a 457 plan and are interested in diversifying your retirement savings by buying assets like precious metals, you will first need to open a Self-Directed IRA (SDIRA).
Approved by the IRS, SDIRAs are authorized to go beyond conventional assets like mutual funds, stocks, and bonds and hold alternative assets like gold and silver. SDIRAs come in the same types commonly encountered with conventional IRAs—Traditional, Roth, SEP, and SIMPLE—they’re just able to hold a wider range of IRS-approved asset types.
If eligible, you would then roll over funds from your 457 plan into your SDIRA.
Your Precious Metals Specialist can help you review your account for rollover eligibility. Rollover rules and eligibility can vary with the individual plan, and so the most accurate determinations can be made by reviewing each particular plan. Be sure to have your paperwork handy!
As seen with 401(k)s, you might not be able to roll over your 457 plan if you are still working for the same employer with whom you opened it. Unlike with 401(k)s, this rule generally does not get waived even if you are over 59.5 years of age.
And, as always, we recommend you speak directly with a tax professional about your particular situation.
If you currently have a governmental 457(b) plan, but want to save for retirement through a Precious Metals IRA, there are a few basic steps involved:
Diversifying your retirement portfolio could help protect you from the potential risk and volatility of any one asset type, which is why so many individuals choose to buy precious metals in their IRA.
Learn more about buying a Precious Metals IRA by reviewing our information kit, or call and speak to one of our Precious Metals Specialists today at (800) 355-2116.