The Internal Revenue Service (IRS) sets annual limits on how much money you can contribute to your workplace retirement plans, such as 401(k)s and 457(b)s. For 2023, the combined contribution limit for these plans is $66,000 (up from $61,000 in 2022). This means that you can contribute up to $66,000 to your 401(k) and/or 457(b) plan, regardless of how much you contribute to each plan. However, there is a separate limit on catch-up contributions for people who are age 50 or older. For 2023, the catch-up contribution limit is $7,500. This means that people who are age 50 or older can contribute up to $7,500 more to their 401(k) and/or 457(b) plans than the regular contribution limit.
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Maximizing Retirement Savings with the 457 Plan
401(k) and 457 plans are both employer-sponsored retirement savings accounts that offer tax-advantaged savings. While 401(k) plans are available to employees of both for-profit and non-profit organizations, 457 plans are only available to government employees and employees of certain non-profit organizations.
Contribution Limits
- 401(k) plans: The maximum amount that an employee can contribute to a 401(k) plan in 2023 is $22,500 ($30,000 for employees age 50 or older).
- 457 plans: The maximum amount that an employee can contribute to a 457 plan in 2023 is $22,500, plus an additional catch-up contribution of $6,500 for employees age 50 or older.
In general, 457 plans offer higher contribution limits for both non-profit and government employees. 401(k) plans offer higher total contribution limits when combined with employer matching contributions.
Investment Options
Both 401(k) and 457 plans offer a variety of investment options, including mutual funds, stocks, and bonds. Employees should consult with a financial advisor to determine which investment options are right for them.
Tax Treatment
- 401(k) plans: Contributions to 401(k) plans are made on a pre-tax basis, which means that they are deducted from your paycheck before taxes are calculated. Earnings on 401(k) investments are tax-deferred, which means that they are not taxed until you withdraw the money in retirement.
- 457 plans: Contributions to 457 plans can be made on a pre-tax or post-tax basis. Pre-tax contributions are deducted from your paycheck before taxes are calculated, while post-tax contributions are made after taxes have been calculated. Earnings on 457 investments are tax-deferred, regardless of whether the contributions were made on a pre-tax or post-tax basis.
Withdrawals
- 401(k) plans: Withdrawals from 401(k) plans are taxed as ordinary income. If you withdraw money from a 401(k) plan before age 59 1/2, you may also be subject to a 10% early withdrawal penalty.
- 457 plans: Withdrawals from 457 plans are taxed as ordinary income. However, there is no early withdrawal penalty for withdrawals from 457 plans, regardless of your age.
Other Considerations
- 401(k) plans: 401(k) plans are more widely available than 457 plans, and they may offer a wider range of investment options. However, 401(k) plans are subject to more regulations than 457 plans.
- 457 plans: 457 plans are only available to government employees and employees of certain non-profit organizations. However, 457 plans offer higher contribution limits and more flexibility than 401(k) plans.
Which plan is right for you?
The best retirement savings plan for you depends on your individual circumstances. If you are a government employee or an employee of a non-profit organization, a 457 plan may be a good option for you. However, if you are an employee of a for-profit organization, a 401(k) plan may be a better choice.
| Plan | Employee Contribution Limit | Catch-Up Contribution Limit (Age 50 or older) | Total Contribution Limit (including employer matching contributions) |
|---|---|---|---|
| 401(k) | $22,500 | $7,500 | $66,000 |
| 457 | $22,500 | $6,500 | $62,000 |
Combining 401(k) and 457 Contributions for Optimal Growth
Maximizing retirement savings is crucial for financial security. For those fortunate enough to have access to both 401(k) and 457 plans, strategic coordination can significantly enhance their savings potential.
Combined Contribution Limits
The IRS sets annual limits for contributions to these plans, which are adjusted yearly for inflation.
| Year | 401(k) Plan Limit | 457 Plan Limit |
|---|---|---|
| 2023 | $22,500 | $26,000 |
- For individuals over 50, a catch-up contribution limit of $7,500 is available for each plan.
Strategy for Optimal Growth
To optimize retirement savings, consider the following strategy:
- Maximize 457 Contributions First: 457 plans offer tax-free growth and no required minimum distributions (RMDs) during your lifetime. If eligible, prioritize contributing to your 457 plan up to its limit.
- Utilize 401(k) Plan for Catch-Up Contributions: Individuals over 50 can contribute an additional $7,500 to their 401(k) plan. If you have already maxed out your 457 contributions, this is an excellent opportunity to save more for retirement.
- Diversify Retirement Portfolio: Both 401(k) and 457 plans offer a wide range of investment options. Spread your contributions across different asset classes (e.g., stocks, bonds, real estate) to reduce risk and enhance potential returns.
Additional Considerations
- Employer Matching: Many employers offer matching contributions to 401(k) plans. Take full advantage of these contributions, as they represent free money.
- Eligibility: 457 plans are primarily available to government employees and non-profit organizations. Check with your employer to determine if you are eligible.
- Withdrawal Rules: 457 plans generally have stricter withdrawal rules than 401(k) plans. Withdrawals before age 59½ may be subject to taxes and penalties.
By combining 401(k) and 457 contributions strategically, you can significantly increase your retirement savings, reduce taxes, and secure a more comfortable financial future.
401(k) and 457 Combined Contribution Limits
401(k) and 457 plans are retirement savings plans that offer tax benefits. Both plans have annual contribution limits, and there are also limits on how much you can contribute to both plans combined.
Contribution Limits
The annual contribution limit for 401(k) plans is $22,500 in 2023. The annual contribution limit for 457 plans is $23,000 in 2023. However, there is a combined contribution limit of $66,000 in 2023 for 401(k) and 457 plans.
This means that you can contribute up to $22,500 to a 401(k) plan and $23,000 to a 457 plan, or you can contribute any combination of amounts to the two plans that does not exceed the combined limit of $66,000.
Catch-Up Contributions
Employees who are age 50 or older can make catch-up contributions to both 401(k) and 457 plans. The catch-up contribution limit for 401(k) plans is $7,500 in 2023. The catch-up contribution limit for 457 plans is $3,000 in 2023.
This means that employees who are age 50 or older can contribute up to $30,000 to a 401(k) plan and $26,000 to a 457 plan in 2023.
Tax Implications of Combined 401(k) and 457 Contributions
Contributions to both 401(k) and 457 plans are made on a pre-tax basis, which means that they are deducted from your paycheck before taxes are calculated. This reduces your taxable income and can save you money on taxes.
Earnings on 401(k) and 457 contributions are not taxed until they are withdrawn in retirement. This allows your money to grow tax-deferred, which can help you accumulate more savings for retirement.
Withdrawals from 401(k) and 457 plans are taxed as ordinary income. However, there are some exceptions to this rule. For example, withdrawals that are made after age 59½ are not subject to the 10% early withdrawal penalty. Additionally, withdrawals that are made to pay for certain qualified expenses, such as medical expenses or education expenses, can be made tax-free.
Here is a table that summarizes the tax implications of combined 401(k) and 457 contributions:
| Contribution | Tax Treatment |
|---|---|
| Pre-tax contributions | Reduce taxable income |
| Earnings | Grow tax-deferred |
| Withdrawals | Taxed as ordinary income |
Well, there you have it, folks! The ins and outs of 401k and 457 contribution limits. I know it can be a bit of a head-scratcher, but now you’re armed with all the info you need to make informed decisions. Remember, saving for the future is never too late, and taking advantage of these tax-advantaged plans can set you up for a sweet retirement. Thanks for hanging out, and be sure to drop by again soon. We’ve got plenty more financial wisdom up our sleeves!