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457 Plan Contribution Limits in 2016

Author: Christopher Williams

If you work for a state or local government or a qualified non-profit, your employer may offer a 457(b) plan, which allows you to save for retirement by allocating a portion of each paycheck to a tax-deferred account. However, the Internal Revenue Service (IRS) imposes strict limitations on total contributions that can be made to a 457(b) plan.

These limitations are updated annually to accommodate changes in the average cost of living, so it can be difficult to keep track of how much you are allowed to contribute in any given year. To help you maximize your retirement savings, understand the limits on 457(b) plan contributions for 2016 and how and when you may be eligible to make additional contributions.

Contribution Limit for 2016

Unlike 401(k) plans, there is only one annual contribution limit for 457(b) plans. For 2016, the total of all contributions to a 457(b) plan cannot exceed $18,000, or 100% of the employee's salary, whichever is less. This limit includes employee salary deferrals, elective contributions and employer contributions. If you work for more than one employer and participate in multiple 457(b) plans, your total contribution to all plans cannot exceed this limit.

However, if you participate in another type of plan through any employer, such as a 401(k) or 403(b), you may make the maximum allowable contribution to both plan types within the same year. Contributions to a 457(b) plan do not reduce the amount that you may contribute to your other accounts.

Traditional Catch-Up Contributions

Employer-sponsored retirement savings plans like 401(k), 403(b) and 457(b) plans were created to encourage employees to plan for their own financial futures rather than rely on Social Security or other government benefits. To encourage employees nearing retirement age to accelerate their savings in their final working years, the IRS allows 457(b) plan participants over age 50 to make additional catch-up contributions that exceed the above limits.

For 2016, employees 50 and older can make up to $6,000 in catch-up contributions to 457(b) plans, for a total maximum contribution of $24,000.

Special Catch-Up Contributions

Unlike 401(k) plans and other non-governmental retirement savings vehicles, 457(b) plans may also allow participants to make special catch-up contributions in the three years leading up to a specified normal retirement age.

If your plan allows for special catch-up contributions and you meet the age requirements outlined in your plan, then you may be eligible to make plan contributions up to twice the normal annual limit. In 2016, this means your maximum allowable contribution is $36,000.

However, you are only eligible for this maximum limit if the total cumulative amount of your unused contributions for all prior years is equal to or greater than the current annual limit. If you have made the maximum contribution for every year that you have participated in your 457(b) plan, then you are not eligible to make special contributions, but you would still be eligible for traditional catch-up contributions.

You cannot make both traditional and special catch-up contributions in the same year. If your 457(b) plan allows for special catch-ups and the aggregate amount of all your prior contributions is at least $6,000 less than the total amount allowable for all years combined, then the special catch-up contribution option is the more pragmatic choice.

Example

Assume that you, at age 52, work for a single government employer that offers a 457(b) plan. Assuming you earn $100,000 annually, you can automatically contribute up to $18,000 during 2016. Since you are over 50, you can also elect to make $6,000 in traditional catch-up contributions, for a combined total of $24,000.

However, your 457(b) plan allows plan participants age 52 to 55 to make special catch-up contributions instead of the standard $6,000 catch-up payments. Assume that, in the 10 years that you have participated in the plan, you have contributed $150,000 out of a maximum of $175,000. Since the difference between your actual contributions and the maximum is more than the current annual limit of $18,000, you are eligible to make up to $36,000 in contributions to your 457(b) plan in addition to any contributions you make to qualified retirement plans.

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