After you have read this post till the letter, you would be able to determine how qualified you are for a 457 compensation plan. And if you are not, you would have gained insight on what a 457 compensation plan is and how it works.
A compensation plan is a detailed outline of how an organisation will reward its employees for their work. If you are an employee, especially a full-time employee, you are expected to be in an established compensation plan of your organisation.
Compensation plan includes salary, benefits, bonuses, and other incentives. The goal is to motivate employees, attract top talent, and retain valued staff.
What is a 457 Compensation Plan?
A 457 plan is a type of tax-deferred retirement plan that allows employees to save for retirement on a pre-tax basis. The thing about 457 compensation plan is that it is commonly offered by tax-exempt organisations, such as hospitals, universities, and government agencies.
This is how organizations through human resources work on compensation plans: they set aside some funds known as contributions before taxes, reducing taxable income, and the funds grow tax-deferred.
Eligibility in 457 Compensation Plan
To be eligible for a 457 plan, you typically must be an employee of a tax-exempt organization or a government agency. The list of the organisations and agencies included /are hospitals, charities, employees of government agencies, employees of certain tax-exempt educational institutions.
For instance, if you work in a hospital that is non-profit or any of the organisations and agencies identified previously, you are eligible to participate in that establishment’s 457 plan.
Features of a 457 Plan
There are basic features for a 457 plan, and they include:
- Contributions are made on a pre-tax basis.
- Funds that are contributed grow as tax-deferred.
- Withdrawals of funds are taxed as ordinary income.
- Loans may be available, but participants are to watch out for penalties that are likely to occur.
Take, for instance, if N500,000 is contributed to your 457 plan in a given year, you will not pay taxes on that N500,000 until you withdraw the funds in retirement.
How to Enroll in 457 Plan
- The first step to take in enrolling in 457 plan is by checking with your human resources department to see if your employer offers a 457 plan.
- Review the plan details.
- Fill out the necessary enrollment forms.
- Make a decision on your monthly contributions.
For every region, there are different requirements for 457 plan. Age, employment status, and other basic requirements are factors used in participating in this plan. Also, withdrawal rules for contribution plan vary, but generally, employees are expected to wait till seventy and a half before they can withdraw their funds without penalty. That being said, some plans may allow earlier withdrawals for certain expenses, such as qualified education expenses or first-time home purchases.
Overall, making personal and proper findings is critical to how successful this plan is executed. You can also check out other posts we’ve written covering the subject of tax and other topics identified in this post.
