Your employer’s 457(b) plan may allow Roth contributions in addition to pre-tax contributions; these are made after-tax.
Yes, you can have both a Roth IRA and a Roth 457(b) plan. These are two separate retirement savings options with different contribution limits, eligibility requirements, and tax benefits.
Roth IRA
A Roth IRA is a retirement savings account that allows you to contribute after-tax dollars. The earnings on these contributions grow tax-free, and you don’t have to pay taxes on withdrawals in retirement, as long as you meet certain requirements.
- Contribution Limit: $6,500 for 2023 ($7,000 if you’re 50 or older)
- Eligibility: Anyone with earned income can contribute to a Roth IRA, regardless of their income level. However, there are income limits for contributing the full amount.
- Tax Benefits: Contributions are made with after-tax dollars, so they are not tax-deductible. However, the earnings grow tax-free, and withdrawals in retirement are also tax-free if you meet the requirements.
Roth 457(b) Plan
A Roth 457(b) plan is a retirement savings option available to employees of certain government and non-profit organizations. It allows you to contribute after-tax dollars, and the earnings grow tax-free. Withdrawals in retirement are also tax-free if you meet certain requirements.
- Contribution Limit: $22,500 for 2023 ($30,000 if you’re 50 or older)
- Eligibility: Only employees of eligible government and non-profit organizations can contribute to a Roth 457(b) plan.
- Tax Benefits: Contributions are made with after-tax dollars, so they are not tax-deductible. However, the earnings grow tax-free, and withdrawals in retirement are also tax-free if you meet the requirements.
Key Differences between Roth IRA and Roth 457(b) Plan
Here’s a table summarizing the key differences between Roth IRA and Roth 457(b) plan:
| Feature | Roth IRA | Roth 457(b) Plan |
|---|---|---|
| Contribution Limit | $6,500 ($7,000 if 50 or older) | $22,500 ($30,000 if 50 or older) |
| Eligibility | Anyone with earned income | Employees of eligible government and non-profit organizations |
| Tax Deductibility of Contributions | No | No |
| Tax-Free Growth | Yes | Yes |
| Tax-Free Withdrawals | Yes, if requirements are met | Yes, if requirements are met |
| Income Limits | Yes | No |
Advantages of Having Both Roth IRA and Roth 457(b) Plan
There are several advantages to having both a Roth IRA and a Roth 457(b) plan:
- Higher Contribution Limits: The combined contribution limit for a Roth IRA and a Roth 457(b) plan is significantly higher than the limit for either plan individually. This allows you to save more for retirement and potentially reach your retirement goals faster.
- Tax Diversification: By having both Roth and pre-tax retirement accounts, you can diversify your tax exposure in retirement. This can help you manage your tax liability and potentially reduce your overall tax burden.
- Flexibility in Retirement: Having both Roth and pre-tax retirement accounts gives you more flexibility in retirement. You can choose to withdraw from your Roth accounts first to avoid paying taxes on the earnings, or you can withdraw from your pre-tax accounts to reduce your taxable income in retirement.
If you are eligible to contribute to both a Roth IRA and a Roth 457(b) plan, it can be a wise strategy to take advantage of both options. This will allow you to save more for retirement, diversify your tax exposure, and have more flexibility in retirement.
Disclaimer
I am an AI chatbot and cannot provide financial advice. The information provided above is for general knowledge and informational purposes only, and does not constitute professional financial advice. It is essential to consult with a qualified financial advisor for any financial decisions.
When Can Roth Assets Be Withdrawn from a 457(b) Plan?
Contributions and related earnings from Roth assets may be distributed if:
- Five years have elapsed since January 1st of the year that your Roth account’s first contribution (including roll-ins) was made.
- You are either deceased or at least 59½ years old.
The earnings portion of any distribution will be taxable if the conditions for a qualified distribution are not satisfied and the assets are not rolled into another eligible plan.
Opening a Roth 457(b)
Please get in touch with us if you want to start a 457(b) plan, offer your employees a Roth contribution, or both.
Roth IRA vs Roth 457(b): Which Should You Prioritize?
FAQ
Can I roll my Roth 457 into a Roth IRA?
Are you allowed to have a Roth IRA and a Roth 401k?
Does Roth 457 reduce taxable income?
Can you have multiple Roth IRAs?
Can I contribute to a 457 plan & a Roth IRA?
You can contribute to a 457 plan and a Roth IRA if you qualify. The Internal Revenue Service limits how much you can contribute to a 457 plan and a Roth IRA account. The 457 plan gives you an up-front tax break, while the Roth IRA provides tax-free income during retirement. What Is a 457 Plan?
What is the difference between a Roth IRA and a 457(b)?
Roth IRA and 457 (b) accounts offer tax-advantaged ways to save for retirement. Almost anyone can open a Roth IRA account, while 457 (b) plans are only available to employees of state and local governments that sponsor the plans, and some non-profit workers whose employers offer them.
Can You rollover a 457 plan to a Roth IRA?
You can siphon amounts from your 457 plan and, within 60 days, contribute them to a Roth IRA. Your employer must withhold 20 percent of this amount for taxes. The second method is the direct rollover option. All 457 plans must allow a direct transfer of the rollover amount to your Roth IRA trustee. Can you lose money in a 457 plan?
Should you invest in a Roth IRA if you have a pre-tax 457(b)?
When you contribute to a Roth IRA, you have less money available to invest because you’re paying income tax on the money before you contribute it. The additional money invested in a pre-tax 457 (b) plan could compound into a significant difference over time.