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How does a Roth 457(b) work?

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If you work for a state or local government or certain nonprofits like a union or a charity, a 457(b) retirement plan can be a great way to grow your income for later years. If your employer offers the plan, you may need to choose between a traditional 457(b) and a Roth 457(b).

These two account types share many features, but the Roth version may stand out if you have a particular tax strategy in mind. Exploring the distinctions of a Roth 457(b) can help you make the best decision now for your future self.

What is a 457(b)?

457(b) plan is an employer-sponsored, tax-advantaged plan that lets you save and invest for your retirement. It's similar to other employer-sponsored plans like 401(k)s and 403(b)s, but it's specifically for civil, municipal and state workers and contractors as well as some tax-exempt employees. You'll contribute either pre-tax or post-tax money that grows tax-deferred until you reach retirement.

Whether you choose a traditional (pre-tax) or Roth (post-tax) version, you won't face income limits to contribute, and you'll likely have the same investment options. More general characteristics of the 457(b) include:

457(b) contribution limits for 2023 & 2024

You can add money to your 457(b) up to the annual IRS limits. These amounts change annually, but for 2023:

  • 2023: The contribution limit is $22,500 if you're younger than 50 or $30,000 if you're 50 or older.
  • 2024: The contribution limit is $23,000 if you're younger than 50 or $30,500 if you're 50 or older.
  • In the three years before your retirement, you may be able to double your maximum annual contribution. You would do this instead of leveraging the 50-or-older catch-up contribution, and the exact amount would depend on your previous contributions.

457(b) early withdrawal timing & penalties

Traditional and Roth 457(b)s differ slightly from other employer-sponsored retirement plans around early-withdrawal penalties:

  • While you're with the employer, early withdrawals may be limited unless you meet specific circumstances, such as an unforeseeable financial hardship.
  • But if you leave the employer for any reason and at any age, you can withdraw from your 457(b) account without a penalty, you will incur taxes on the earnings on the Traditional version regardless of age. Roth version you must meet the qualified distribution requirements in order for your distribution to be tax-free.1

What's different about a Roth 457(b)?

The main difference between traditional and Roth 457(b)s lies in how you're taxed. Contrary to traditional 457(b)s, you pay income tax on your paycheck dollars before they go into the Roth 457(b) account. After that, the earnings grow tax-free, and qualified withdrawals are completely tax free in retirement. To make a qualified withdrawal, you'll need to have had the account for at least five years and be at least 59½.

Starting in 2024, thanks to the SECURE Act 2.0, Roth accounts—including Roth 457(b)s—don't have required minimum distributions (RMDs). This means you don't have to take out a certain portion of money every year once you reach a certain age. This differs from traditional retirement accounts, where RMDs usually kick in at your required beginning date.

Why would you choose a Roth 457(b) over a traditional 457(b)?

While the traditional 457(b) tax deduction has certain benefits, the tax-free retirement income you can draw from a 457(b) Roth account could help you stretch your savings further. It depends on which serves you better when calculating your tax liability: paying it now or later.

  • If you think you're currently at peak earnings potential and expect to be in a lower tax bracket in retirement, a traditional 457(b) may be appropriate since you'll be paying those taxes in retirement.
  • If you think your peak earnings point is farther off and expect to be in a higher tax bracket in retirement, then a Roth 457(b) may be more beneficial since you'll be paying those taxes in a lower tax bracket now.

When you're weighing retirement plan options like these, it's a good idea to look at your overall financial strategy and consider diversifying your investments to maximize your tax efficiency across different points in your life.

Is a Roth 457(b) the same as a Roth IRA or other Roth accounts?

No. Several kinds of retirement accounts share the "Roth" name, and while they have similar tax treatments, they each have different purposes.

A Roth 457(b) is a retirement planning benefit offered by an employer. So are Roth 401(k) and Roth 403(b) accounts. However, a Roth IRA is a separate account you can open and invest in on your own, without an employer's backing. Roth IRAs have their own contribution and withdrawal rules and also have income limits.2

Is a Roth 457(b) right for you?

How a Roth 457(b) works for your retirement strategy depends on how you're planning out your financial future. While putting your money in a 457(b) Roth account can allow you to grow a substantial amount of tax-free retirement savings, you may prefer to defer your tax liability until retirement with a traditional 457(b).

If you need guidance on which retirement savings options fit best with your specific financial strategy, you can talk them through with your local Thrivent financial advisor.

1Distributions of earnings are tax-free as long as your Roth account is at least five years old and one of the following requirements is met: (1) you are at least age 59½; (2) you are disabled; (3) you are purchasing your first home ($10,000 lifetime maximum); or (4) the money is being paid to a beneficiary.

22023: You may contribute to a Roth IRA if your modified adjusted gross income for 2023 is less than $138,000 (single filer) or less than $218,000 (joint filer). Contribution reduced if MAGI is between $138,000 and $153,000 on a 2023 single return and $218,000 and $228,000 on a 2023 joint return. 2024: You may contribute to a Roth IRA if your modified adjusted gross income for 2024 is less than $146,000 (single filer) or less than $230,000 (joint filer). Contribution reduced if MAGI is between $146,000 and $161,000 on a 2024 single return and $230,000 and $240,000 on a 2023 joint return. If you are a married taxpayer who files separately, consult your tax professional.

Thrivent and its financial advisors and professionals do not provide legal, accounting or tax advice. Consult your attorney or tax professional.

While diversification can help reduce market risk, it does not eliminate it. Diversification does not assure a profit or protect against loss in a declining market.