Buying Gold and Silver with Your 457 Plan
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.
Benefits of a 457 Plan
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:
- Higher contribution limits – The 457 plan usually comes with a $19,500 contribution limit, plus an additional $6,500 for anyone 50 years of age or older. While the same limits apply for 401(k)s, 403(b)s, and Thrift Savings Plans (TSP), this cap is still higher than all IRAs except SEPs.457(f) plans actually differ on contribution limits, capping out at 100% of your income. However, this benefit comes with a huge potential risk. Unlike 457(b)s – and all other defined contribution plans for that matter – employer contributions in 457(f)s are forfeited if they aren’t vested; meaning if employment is severed before a predefined amount of time, those funds are gone.
- Easier “catch-up” period – If an employee hasn’t maxed out their contribution each year, 457s offer a superior catch-up period to most other plans. The lesser of either $39,000 or the annual limit plus unused portions of previous years’ limits can be contributed in the final three years prior to the normal retirement age, which is defined by the individual plan.
- No fee for early withdrawal – While you can’t take withdrawals from a 457 plan if you continue to work for the employer offering the plan until you reach the age of 72 (formerly 70.5), this limit is severed when you leave the employer. So, you may withdraw funds from a 457 plan before 72 without a penalty at all (compared to 10% for most other plans), as long as you aren’t still an employee.
- Work well with other plans – 457s are sometimes offered alongside 403(b)s. Contributions to other plans don’t eat into the limits for 457s. So, a teacher with both plans can contribute the maximum to both plans, raising the amount of their overall savings.
- Employer match – While not as common as employer matching in 401(k)s for instance, they can match a percentage of the contribution in 457s.
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.
Rules of a 457 Plan
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.
- Limited investment choices – Similar to 401(k)s, 457s offer limited investment choices. Depending on the vendor, options may be limited to annuities or a small number of mutual funds. This can severely limit or exclude choices such as precious metals.
- Not subject to discrimination testing – Unlike 401(k)s, 457 plans can be offered completely at the employer’s discretion. In practice, this means non-governmental 457(b)s are sometimes only offered to employees with higher salaries, which is why they are sometimes referred to as “top-hat” plans.
- 457(b)s fall under the IRS required minimum distribution rule – Like 401(k)s and 403(b)s, 457 plan owners must begin to take distributions at the age of 72. 457(f) plans, however, are typically paid out in a lump sum upon separation of service and taxed at that time.
The IRS has more details about the specific rules and technicalities of 457 plan taxation, contribution limits, and other similar guidelines.
Precious Metals and 457 Plans
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:
- They offer a safe-haven approach. Precious metals such as gold or silver can shield against fluctuations in stocks, bonds, and even cash.
- They endure far better than fiat currencies. The value of the dollar can be quite volatile. When the strength of the dollar is reduced, gold often rises—which could protect your retirement savings during troubled economic times.
- They retain value. Inflation can devastate savings if all of your holdings are in fiat currency. Precious metals offer protection against inflation. This can offer great peace of mind.
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.
How to Buy Precious Metals With A 457 Plan
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.
Am I eligible to roll over my 457 plan?
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.
How do I open a Precious Metals IRA with Birch Gold?
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:
- Open a new SDIRA. Set up your new account with your new custodian. Your Precious Metals Specialist will walk you through the types of SDIRA you can open, as well as our custodian partners with whom you can get started.IRS-approved and specialized in precious metals, we most frequently turn to Equity Trust Company and STRATA Trust Company.
- Roll over funds from your 457 plan, or transfer from other retirement accounts. The funds you’ll choose to transfer or roll over will depend on your retirement goals as well as your eligibility. Your Precious Metals Specialist will be on-hand to navigate these steps as well as get through the paperwork with your old custodian.
- Choose your precious metals. Gold has retained its value over time and has endured to be one of the oldest precious metals in use. Very often, gold is one of the first Precious Metals IRAs that people hear about.But Birch Gold actually offers four types of IRS-approved precious metals that you can place into your retirement account: gold, silver, platinum, and palladium. Your Specialist can go over these in more depth.
- Make your purchase. Your Precious Metals Specialist will do another run-through of the transaction to confirm your purchase. Once you say the word, the transaction will take place.
- Store your gold, safe and secure. You will get to pick your depository from a list of approved options. Birch Gold usually works with Delaware Depository, which is the nation’s largest depository for precious metals, and Brinks Global Services, leading global provider of secure logistics. Both depositories carry are insurance for metals that you store with them.
- Watch your retirement savings. From there, the only thing left is to keep an eye on how your Precious Metals IRA is doing. You’ll be able to connect directly with a Birch Gold Specialist to help with this and obtain the most up-to-date quotes.
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.