Retirement insights from a Colorado PERA perspective

Inside Colorado PERA

PERAPlus 457 Plan Reaches $1 Billion Milestone

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Photo credit: Foundry Group – 519831592-iStock/Thinkstock

For the first time, PERA members have amassed $1 billion in savings in PERAPlus 457 accounts. The account plays a unique role in the world of retirement planning. For those in PERA’s DB plan, a 457 plan can serve as a source of flexible savings.

The 457’s Place in the Savings Universe

A 457 plan is a type of tax-advantaged retirement plan (like a 401(k), 403(b), etc.) that is primarily reserved for government employees. Jeffrey Cable, the Defined Contribution Manager at PERA, says changes in federal law over the last 15 years have minimized the number of differences among these types of accounts, which can make them seem indistinguishable. But one key difference remains, and it’s significant.

Whereas in most retirement accounts you must reach a certain age before making penalty-free withdrawals, the 457 allows a person to take penalty-free distributions immediately upon leaving the person’s job.

What a 457 Looks Like in Practice

Say a person starts a position at a PERA-covered employer at age 25 and saves $1,000 each year. That person is able to invest those dollars in the same PERAPlus funds available to participants of PERA’s 401(k).

Between savings and investment gains, imagine that person leaves employment at age 35 with $15,000 in their 457 ($1,000 annual savings x 10 years, plus $5,000 in gains from investments). That person is able to access these funds at age 35 without the tax penalty.

If those same funds were instead in a 401(k), distribution of the funds would be penalized by the IRS in the form of additional taxes until that person turned 59.5.

Taking Advantage of the 457

The lack of age restrictions can add flexibility to financial planning, Cable said. Although 457 savings are retirement savings, the ability to withdraw them before retirement can allow those funds to serve double duty–a backup emergency fund, for example. “It can be perfect for young people who may or may not have a full career in their current role,” he said.

PERAPlus 457 Facts and Figures

Administered by PERA since: 2009

Number of PERA participants as of December 31, 2019: 18,919

Available to: Every PERA employer can offer the 457 to employees, though not every employer has enrolled in the program.

Tax advantages: You make contributions to a 457 account on a pre-tax basis; then you pay taxes when you take distributions in the future. Some employers offer a Roth 457 option as well. In that case, you may choose to also make tax-paid contributions, and qualified distributions are tax free.

The maximum amount you can save in a 457 plan in calendar year 2020 is $19,500. This is not a coordinating limit—you may contribute the maximum to a 457 and a 401(k) this year. If you are 50 or older, you may contribute up to $26,000 in each plan—or, if you are in your last three years before retirement, you may be eligible to contribute even more.

However, few members hit that max. In fact, most PERA members with a 457 account contribute between $1 and $416 each month. Here’s the breakdown:

Annual contributions Number of PERA participants
$0-$5,000 7,237
$5,001-$10,000 1,151
$10,001-$15,000 530
$15,000+ 1,614

Defined contributionA type of individual retirement plan in which an employee saves a portion of each paycheck (along with a potential employer match) and invests that money. The employee’s retirement benefit is based on their account balance at retirement. A 401(k) is a type of defined contribution plan.

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