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The Benefits and Considerations of Traditional 457 Plans


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As you navigate through your career, it's important to plan for your financial future. One option that may be available to you is a traditional 457 plan, offered by your county job. However, you may have some questions about whether this plan is the right choice for you. Specifically, if you are on the younger side and anticipate making more money in the future, is it better to opt-out of the plan? Let's dive into the details and explore the benefits and considerations of traditional 457 plans.

Understanding Traditional 457 Plans

A traditional 457 plan is a type of retirement savings plan offered by certain employers, typically government agencies or non-profit organizations. It allows employees to contribute a portion of their salary, on a pre-tax basis, to an investment account. The contributions and any earnings on the account are then taxed as ordinary income when they are withdrawn during retirement.

In your case, your county job only offers a traditional 457 plan due to your employee status. This means that if you choose to participate in the plan, your contributions will be deducted from your paycheck before taxes are taken out. This can provide immediate tax savings, as your taxable income will be reduced by the amount you contribute to the plan.

The Benefits of Traditional 457 Plans

One of the main benefits of traditional 457 plans is the tax advantage they offer. By contributing pre-tax dollars to your retirement account, you can lower your taxable income and potentially reduce your overall tax bill. This can be especially advantageous for individuals who anticipate being in a lower tax bracket during retirement.

In addition, traditional 457 plans have higher contribution limits compared to other retirement plans, such as 401(k)s or IRAs. For 2021, you can contribute up to $19,500 to your traditional 457 plan, plus an additional $6,500 if you are over the age of 50. This can allow you to save more for your retirement years.

Considerations for Higher Earning Potential

As you mentioned, you are on the younger side and anticipate making more money in the future. While this is a positive outlook, it's important to consider how it may impact your traditional 457 plan. If you are in a higher tax bracket during retirement, you may end up owing more in taxes on your withdrawals from the plan.

However, it's important to remember that traditional 457 plans do offer some flexibility. You can choose to withdraw funds at any time during retirement, not just once you reach a specific age like with other retirement plans. This can allow you to strategically withdraw funds in a way that minimizes your tax burden.

Additionally, it's important to keep in mind that your income may fluctuate over the course of your career. While you may anticipate making more money in the future, there is no guarantee. By participating in a traditional 457 plan, you are still saving for your retirement and taking advantage of the tax benefits it offers.

Consult with a Tax Advisor

Ultimately, the decision to participate in a traditional 457 plan should be based on your individual financial situation and goals. It's always a good idea to consult with a tax advisor before making any major financial decisions. They can help you understand the potential tax implications of participating in a traditional 457 plan and provide personalized advice based on your specific circumstances.

In conclusion, traditional 457 plans can be a valuable tool for saving for retirement, especially for those in lower tax brackets. While there are considerations to keep in mind for individuals with higher earning potential, it's important to weigh the benefits and consult with a tax advisor before making a decision. Your financial future is important, and a traditional 457 plan may be a valuable piece of your retirement planning puzzle.