457(b) plans are retirement plans for government workers and for highly-compensated employees of non-profit organizations. As such, 457's are offered by some of Utah's largest employers, including Intermountain Healthcare and the University of Utah.
These plans are analogous to 401(k)'s and 403(b)'s, but they differ in one critical way. While contributions to 401(k)'s and to 403(b)'s combined cannot exceed $18,500 ($24,500 if age 50 or older) in 2018, 457(b)'s have a separate contribution limit. In other words, a 50-year old physician working for IHC or at the University of Utah, for example, could contribute a total of $49,000 this year to these plans.
Reducing taxable income by making 457(b) retirement plan contributions may produce additional, secondary tax benefits (and especially for upper-income taxpayers) such as:
- reducing or eliminating exposure to the net investment income tax,
- making IRA contributions for the taxpayer or a spouse tax-deductible,
- avoiding income level phase-outs on a variety of tax deductions, and
- being able to make Roth IRA contributions.
Too often do we see clients and prospective clients maxing out their 401(k)'s or 403(b)'s, but neglecting their 457's. Whether this is because governmental and nonprofit employers aren't educating their workers sufficiently about 457(b)'s is unclear. What is clear is that the higher a taxpayer's income, the more important tax planning becomes, regardless of the new lower individual tax rates in the Tax Cuts and Jobs Act (TCJA).
About the Author
Paul Winter, MBA, CFA, CFP® is a Fee-Only financial advisor and fiduciary in Salt Lake City, UT. His independent wealth management firm, Five Seasons Financial Planning, provides professional portfolio management and objective financial planning services to individuals and families, and to their related entities including trusts, estates, charitable organizations, and small businesses.