A 457 retirement plan account is a tax-advantaged retirement savings account offered to employees of state and local governments, as well as certain non-profit organizations. While contributions to a 457 plan are tax-deferred, meaning you don’t pay taxes on the money you contribute until you withdraw it, it does not directly eliminate your individual tax bill.
However, there are a few strategies you can employ to potentially reduce your tax liability using a 457 retirement plan account:
1. Maximize contributions
By contributing the maximum amount allowed by the plan each year, you can reduce your taxable income. For 2021, the maximum contribution limit for a 457 plan is $19,500, and individuals aged 50 or older can make an additional catch-up contribution of $6,500.
2. Lower your taxable income
Since contributions to a 457 plan are made on a pre-tax basis, they reduce your taxable income for the year. This can potentially move you into a lower tax bracket, resulting in a lower tax bill.
3. Tax-free growth
Any investment gains within your 457 plan account are not subject to capital gains taxes until you withdraw the funds. This tax-free growth can help you accumulate more savings over time.
4. Roth 457 option
Some 457 plans offer a Roth option, where contributions are made on an after-tax basis. While this won’t directly reduce your tax bill, it can provide tax-free withdrawals in retirement, as long as certain conditions are met. This can be advantageous if you expect your tax rate to be higher in retirement.
5. Tax diversification
By contributing to both a traditional pre-tax 457 plan and a Roth 457 plan (if available), you can create tax diversification in retirement. This allows you to have a mix of taxable and tax-free income sources, giving you flexibility to manage your tax liability.
It’s important to note that while a 457 plan can provide tax advantages, it does not completely eliminate your individual tax bill. It can, however, help you reduce your taxable income and potentially lower your overall tax liability. Consulting with a financial advisor or tax professional can provide personalized guidance based on your specific situation.
