Tax Considerations
The general tax rules described below are the federal income tax rules as of 1 January 2001 and may be subject to exceptions. Always check your state (and local) income tax rules on 457 plans. Finally, since tax laws may (and probably will) change from time to time, always check with your tax advisor before making major decisions regarding your 457 plan.

Eligibility
Employees of qualifying organizations may participate.

Contribution Limits
There's a general rule and a special “catch-up” (up to $6,500 additional contribution) rule.

The General Rule
Basically, you can contribute the lesser of:

1. 19,500 in the year 2021 or

2. 25% of your compensation before taxes and 457 plan contribution (this is equal to 33 1/3% of your includable compensation)

Catch-up Contributions
During the last three years before reaching normal retirement age, employees may make contributions of up to $26,000 ($19,500 + 6,500 “catch up” provision) per year. That amount is allowed to the extent the general rule limits (i.e., the lesser of $26,000 or 33 1/3% of compensation) have not been used in prior years.

Vesting
Employee contributions are 100% vested. Employer contributions can be 100% vested if you work long enough or if the plan requires 100% vesting.

Benefits of the 457 Plan
Many variables determine whether you’ll meet, exceed or fall short of your retirement income goal. These variables include:

1. Contributions can be up to lesser of 19,500 or 33 1/3% of compensation (special catch-up contributions may be allowed, too)

2. Contributions aren't considered part of an employee's salary for income tax purposes

3. Earnings and contributions grow tax-deferred without any reduction for income tax each year

4. Employee contributions and earnings are 100% vested

5. You may be able to borrow from the plan

6. You may delay the start of distributions beyond age 70½ if you continue to work

7. No penalty for distributions before age 59½

8. Special creditor protection may be available

Negatives of the 457 Plan

1. Distributions of earnings and contributions are taxed at ordinary income tax rates (from 15% to 40% for federal tax plus state tax as of 1 January 2021

2. Employees generally make the contributions, and there usually is no employer match or contribution

3. Employer contributions and earnings may have vesting requirements

Timing of Distributions
Distributions may also be made when you:

1. separate from your employer's service (when you no longer work there) or

2. are age 70½ or

3. become disabled or

4. have an unforeseen financial emergency (not all plans allow this and there are detailed IRS regulations defining what is and is not an unforeseen emergency-note that paying college expenses or buying a home is not an unforeseen emergency) or

5. die

You must start taking distributions by April 1 of the year after you reach age 70½. However, if you want to delay distributions until you stop working after age 70½, you can wait until April 1 of the year following retirement.

Special Election
Between the time benefits may be paid to you and the time they have actually started, you can make a one-time election to delay the benefits.

Income Taxes & Penalties
Distributions of earnings and contributions are usually subject to federal and state ordinary income tax (the federal rate is from 15% to 40%, as of 1 January 2021).

Unlike other retirement plans which can impose a penalty on distributions before you are age 59½, 457 plans do not have this penalty.

If you don't start taking the required distributions by age 70½ or qualify to receive later distributions, a penalty will be charged.

Beneficiary Designations
Legal and tax advice is useful when determining how to complete beneficiary designations. Properly completed designations can help save estate (death) tax, avoid probate, allow better income tax opportunities and avoid creditor claims on retirement assets.

Extra care needs to be taken in naming trusts as a beneficiary of most retirement assets in case of a death. Sometimes, naming trusts as a beneficiary can trigger income tax sooner than it would otherwise be owed and reduce the amount ultimately shielded from death tax.

Note that many plans require the participant’s spouse to be the beneficiary, unless the spouse provides written permission for another beneficiary to be named.

Creditor Protection
Retirement plans and accounts may have special creditor protection under federal and/or state laws. Different types of plans and accounts may have varying degrees of protection. State protection rules may also vary from state to state.

If you convert from one type of plan to another (e.g., from a traditional IRA to a Roth IRA), you may be changing how much protection you have. This may be also be the case if you move to another new state where the new state rules are different.

Consulting with an attorney for guidance on the creditor protection issue may be helpful.

Estate & Death Taxes
Retirement assets are added to your other assets and may be subject to federal and/or state death (estate) tax. It depends upon the size of your overall estate and the estate planning done for you. Consult with your advisor about ways to defer or avoid estate tax.

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Charles M. Bloom, Registered Principal offers securities and advisory services through Centaurus Financial, Inc. - Member FINRA and SIPC - 775 Avenida Pequena, CA, 93111 (mailing address: 3905 State Street Suite 7173, Santa Barbara, CA, 93105) - CA Life Insurance License No. 0A52786 - Centaurus Financial, Inc. and Shoreline Wealth & Investment Management are not affiliated companies.

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