457 Plan vs. Roth IRA

Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

What Are They?

Roth IRA: An individual retirement account allowing after-tax contributions with the benefit of tax-free growth and withdrawals. It’s available to anyone with earned income within the IRS income limits.

457 Plan: A deferred compensation plan available to employees of state, local government, and some nonprofit organizations. It allows pre-tax contributions, with taxes on withdrawals.

Key Differences

FeatureRoth IRA457 Plan
Tax TreatmentContributions are after-tax; withdrawals are tax-freeContributions are pre-tax; withdrawals are taxed
Contribution Limits$7,000 in 2024, plus a $1,000 catch-up if 50 or older$23,000 in 2024, with $7,000 catch-up option if 50 or older
Income RestrictionsYes, based on modified adjusted gross incomeNo income restrictions
WithdrawalsContributions can be withdrawn any time tax-free. Earnings are tax-free after age 59½ and the account being open 5 yearsNo early withdrawal penalty, but distributions are subject to income tax
Employer MatchNot applicablePossible, depends on the employer’s policy
Investment ChoicesBroad range of investment optionsLimited to options provided by the plan

Pros and Cons

Roth IRA Pros:

  • Tax-free growth and withdrawals
  • No RMDs during the account holder’s lifetime
  • Wide range of investment choices

Roth IRA Cons:

  • Income limits for contributions
  • Lower contribution limits compared to 457 plans

457 Plan Pros:

  • Higher contribution limits
  • No early withdrawal penalty if separated from employment, regardless of age
  • Possible employer match

457 Plan Cons:

Which Is Better For You?

  • If you expect to be in a lower tax bracket in retirement: A 457 plan might be more beneficial due to the tax-deferred contributions.
  • If you expect to be in a higher tax bracket in retirement or value tax-free withdrawals: A Roth IRA could be more advantageous.
  • If you want to maximize your contributions: The 457 plan has higher contribution limits.
  • If you’re looking for flexibility with withdrawals and investments: The Roth IRA offers tax-free and penalty-free withdrawals of contributions and a wider range of investment options.

Conclusion

Choosing between a Roth IRA and a 457 plan depends on your individual financial situation, including your current and expected future tax brackets, your investment goals, and how you plan to use the funds in retirement. Both options have unique advantages that can play a crucial role in your overall retirement planning strategy.

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Frequently Asked Questions

How much can I put in a Roth IRA?

For 2024, the contribution limit for a Roth IRA is $7,000 per year. If you are 50 years or older, you can contribute an additional $1,000 as a catch-up contribution, making the total $8,000. Eligibility to contribute to a Roth IRA phases out at certain income levels. Always check current IRS guidelines for updates.

Are 457 plans subject to Required Minimum Distributions (RMDs)?

Yes, 457 plans, which are deferred compensation plans for state and local public employees, as well as certain nonprofit employees, are subject to RMDs. Participants must begin taking distributions from their 457 accounts by April 1 following the year they reach age 73. However, some 457 plans might allow retired participants to delay taking RMDs if they continue to work.

Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

Shawn Plummer is a Chartered Retirement Planning Counselor, insurance agent, and annuity broker with over 14 years of first-hand experience with annuities and insurance. Since beginning his journey in 2009, he has been pivotal in selling and educating about annuities and insurance products. Still, he has also played an instrumental role in training financial advisors for a prestigious Fortune Global 500 insurance company, Allianz. His insights and expertise have made him a sought-after voice in the industry, leading to features in renowned publications such as Time Magazine, Bloomberg, Entrepreneur, Yahoo! Finance, MSN, SmartAsset, The Simple Dollar, U.S. News and World Report, Women’s Health Magazine, and many more. Shawn’s driving ambition? To simplify retirement planning, he ensures his clients understand their choices and secure the best insurance coverage at unbeatable rates.

The Annuity Expert is an independent online insurance agency servicing consumers across the United States. The goal is to help you take the guesswork out of retirement planning and find the best insurance coverage at the cheapest rates

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