Today I’m taking stock of my finances and have found that along with the 401(k) I’ve been contributing to, I also have the option of contributing to a 457. The problem is, I don’t quite know what that is, and all I’ve been able to find online is that it’s like a 401(k) for government employees (I work for the State of Michigan).
Are there any benefits to socking some of my money away in a 457 as opposed to a 401(k)? I’m 22 years old and have been contributing 6% of my pre-tax income to the 401(k) (along with regular contributions to a Roth IRA), so I can spare some extra cash to put it into another retirement account. Since I’m pretty young, I can invest in some “riskier” funds without taking too hard a hit.
Thanks for any advice you guys can give me.
You can read about the two plans available to you here.
IMO you should be maxing out your contributions to the 401(k) before contributing to the 457. First, you are getting employer contributions in the 401(k), including a 100% match on the first 3% of the salary you defer. The 457 has no employer contributions.
Secondly, the 401(k) is much more flexible in case you need to get your money out for an emergency. The 401(k) allows loans where the 457 does not. Also, the 401(k) allows for the standard hardship withdrawals…tuition, medical expenses and money to purchase a home or to prevent eviction from your home. The 457 only allows withdrawals for medical expenses, funeral expenses, natural disasters or the generic, to cover expenses caused by similar extraordinary unforeseeable circumstances beyond your control.
The good news is that if you can afford to, you can make the maximum annual salary deferral contribution ($14,000 in 2005) to each plan.
Also, it appears that the investment choices offered by the two plans are identical.
